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February 3rd, 2010 by William Bronchick, Esq.
By now I am sure you’ve heard that it is legal, permissible, and profitable to invest in real estate using your self-directed IRA, SEP, or Roth IRA. If you’ve been using this technique, you know the drawbacks – delays in funding, fees from your custodian, potential lawsuits against your IRA.
Well, there’s a solution… the LLC-IRA.
Instead of investing directly from your IRA, we set up a single-member LLC that is owned by your IRA. Your IRA account is the sole member of the LLC. The LLC is a legal entity that has powers and protections that are not possessed by any individual or by any regular IRA.
The combination of the self-directed IRA custodian and the LLC produces great results. This is an entirely new type of LLC, not your run-of-the-mill LLC you may have done before. It generally requires an attorney to draft the operating agreement and provide an opinion letter to your IRA custodian. If the LLC operating agreement is improperly drafted, the entire LLC-IRA may be disqualified and taxed.
Lawsuit Protection of Your IRA Account
A single member LLC (Limited Liability Company) is a business entity that gives the liability protection of a corporation but is "disregarded" (ignored) for federal income tax purposes. It is a separate legal entity under state law, so creditors of your LLC (as in the case of a tenant injured on the property) cannot go after the member (your IRA account) or you (the Manager).
As manager of your LLC-IRA, you can write checks as you need to for purchasing property, paying property expenses, or loaning money. If you want to do a deal in a hurry, you can run down to your bank and get a wire or certified funds the SAME DAY, as in the case of a foreclosure auction.
Keep in mind that any transaction you can’t do in your IRA account you are also prohibited from doing in your LLC-IRA. You should not attempt any transaction in your LLC-IRA without competent tax and legal advice.
Steps to Form Your LLC-IRA
First, you need to transfer your existing IRA to a custodian that allows complete self-direction of your account. Big firms like Fidelity and Schwab generally don’t allow you to direct your account into real estate investments.
Second, you need to hire a professional to create the LLC.
Third, you "fund" the LLC by directing the money from your IRA custodian to the LLC’s bank account.
Fourth, you start investing in your LLC-IRA.
Custodial fees are much lower because the IRA only has one asset, the LLC.
Is this all Legal?
The legality of an IRA owning an LLC is based on the case Swanson vs. The Commissioner in 1996. In Swanson, the court ruled in favor of the taxpayer using a corporation owned by his IRA, where he was the president. The LLC, by implication should be the same.
Should you have any questions about the legality of your LLC-IRA, speak with a qualified attorney to advise you through the process.
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