Frequently Asked Questions: LLCs and Self-Directed IRAs
A Limited Liability Company, or LLC, is a distinct legal entity. LLC owners, known as members,
have “limited liability” meaning they receive liability protection, which is similar to a corporation. Creating an IRA LLC is one strategy IRA investors have used to purchase real estate. This gives you checkbook control — a term used when an IRA holder has complete signing authority over his or her retirement funds.
This week we answered three of the most common questions our clients have asked about Self Directed IRAs and LLCs.
Q. Can you invest your SDIRA into an LLC in which you're a member?
A. As long as you, as a member, does not violate IRC 4975 (E). There are ownership thresholds that could make the LLC a disqualified party. It is best to consult with a legal advisor to review your situation before proceeding. See prohibited transactions for more information.
Applicable section of IRC 4975 (E):
(E) an owner, direct or indirect, of 50 percent or more of—
(i) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of a corporation,
(ii) the capital interest or the profits interest of a partnership, or
(iii) the beneficial interest of a trust or unincorporated enterprise, which is an employer or an employee organization described in subparagraph (C) or (D);
(F) a member of the family of any individual described in subparagraph (A), (B), (C), or (E);
(G) a corporation, partnership, or trust or estate of which (or in which) 50 percent or more of—
(i) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of such corporation,
(ii) the capital interest or profits interest of such partnership, or
(iii) the beneficial interest of such trust or estate is owned directly or indirectly, or held by persons described in subparagraph (A), (B), (C), (D), or (E);
(H) an officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10 percent or more shareholder, or a highly compensated employee (earning 10 percent or more of the yearly wages of an employer) of a person described in subparagraph (C), (D), (E), or (G); or
(I) a 10 percent or more (in capital or profits) partner or joint venturer of a person described in subparagraph (C), (D), (E), or (G).
The Secretary, after consultation and coordination with the Secretary of Labor or his delegate, may by regulation prescribe a percentage lower than 50 percent for subparagraphs (E) and (G) and lower than 10 percent for subparagraphs (H) and (I).
Q. Can one LLC hold more than one real estate IRA rental?
A. Yes. A limited liability company can certainly hold more than one real estate IRA rental. There is no limit for holding real estate IRA rentals with your LLC.
Q. In the event that the IRA invests in an LLC that invests in properties, do property expenses still come from the IRA or because it is all being handled by the LLC, none of that needs to come from the IRA?
A. If the IRA invests in an LLC and is handled as a partnership, the general partner will handle the income and expenses of the LLC. If the LLC is a sole proprietorship (single member LLC). Then the LLC is a disregarded entity and therefore the expenses must be paid from the IRA.
Setting up a self-directed IRA with checkbook control can offer many benefits to investors who are interested in alternative investments. This is a popular strategy among real estate investors, as well as those interested in private equity. It offers benefits such as:
- Faster transactions
- Less administrative fees
- More control over you funds
We are here to help you get started....