Self Directed IRA LLC

Frequently Asked Questions

1: What is a SDIRA LLC?

A: A Self Directed IRA LLC is a LLC with a specific purpose operating agreement that allows its manager (you) to control the LLC assets and bank accounts, and to make investments for the benefit of its member(s) (your retirement accounts). The SDIRA LLC strategy has been legitimized by the IRS with the tax court case: Swanson v. Commissioner, 106 T.C. 76106 TC No 3 (1996)

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2: What types of retirement accounts can become members of a SDIRA LLC?

A: Traditional IRAs, Sep IRAs, Roth IRAs, 401(k)s, 403(b)s, Coverdell Education Savings (ESA) a.k.a. Educational IRAs,, Qualified Annuities, Profit Sharing Plans, Money Purchase Plans, Government Eligible Deferred Compensation Plans, Keoghs

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3: What can a SDIRA LLC invest in?

A: It’s easier to understand what your SDIRA LLC can NOT invest in. The IRS rules governing what an IRA can invest in are exclusive - not inclusive. There are only three types of investments that are excluded under the Employee Retirement Income Security Act (ERISA) and IRS Codes 401 IRC 408(a) (3):

  • Life Insurance Contracts
  • Collectibles such as works of art, rugs, jewelry, automobiles, alcohol, etc.
  • Capital stock in a “S” Corporation

Examples of non-traditional investments allowed with a Self-Directed IRA LLC.

  • All forms of real estate, including: Raw land, rental properties, commercial properties, real estate-related private entities (such as limited liability companies that invest in real estate), international real estate.
  • U.S. backed precious metals such as gold, silver and platinum.
  • Golf courses, professional sports teams
  • Tax liens
  • Private loans

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4: What are Prohibited Transactions?

A: As discussed previously, you cannot invest in collectibles, life insurance contracts or “S” Corporation stock. In addition, there are certain transactions in which you cannot participate when using SDIRA LLC funds. These are referred to as "prohibited transactions". Prohibited Transactions are defined in IRC 4975(c)(1) and IRS Publication 590. They were established to maintain that everything the IRA engages in is for the exclusive benefit of the retirement plan. Violations are often referred to as "self-dealing" transactions. Self-dealing occurs when an IRA owner uses their individual retirement funds for their personal benefit rather than to benefit the IRA. As an IRA owner, if you violate these rules, your entire IRA could be considered distributed and hit with penalties and taxes. Keep in mind that you and your IRA are separate. The IRA is for your retirement and should remain separate until at least your age 59 ½. It is very important that you work with competent professionals to help avoid violating these rules.

Examples of Prohibited Transactions

  • Your SDIRA LLC can not buy a house that you or another disqualified person will live in. Even though buying a house may be a good investment, the fact that you live in the house means you are receiving a current benefit.
  • Your SDIRA LLC can not buy assets from you or disqualified person.
  • You may not use your IRA LLC as security for a loan made to you.
  • Your SDIRA LLC can not loan you or any disqualified person money.
  • Your SDIRA LLC or any subsidiary of it can not employ you or a disqualified person.

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5: Who are disqualified persons?
  • The IRA Owner
  • Your Spouse
  • Your Children and Grandchildren
  • Your Parents and Grandparents
  • Your Spouse’s Children and Grandchildren
  • Your Spouse’s Parents and Grandparents
  • Any fiduciaries working on this account such as the account custodian and sponsor
  • Any corporation, partnership, trust or estate in which a disqualified person has a 50% or greater interest

Note: According to IRC 4975, siblings and their children are not included in the definition of disqualified persons. Thus, a loan to your brother would not be a prohibited transaction. Although some suggest that it was an error on the part of the IRS to omit siblings from the definition, they, nonetheless, were omitted and to the best of our knowledge, there has never been an IRS ruling to the contrary.

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6: I don’t have enough money in my IRA to purchase a piece of property outright. Can my SDIRA LLC provide the down payment and get a loan for the balance?

A: Yes you can use your SDIRA LLC funds for the down payment and then have your SDIRA LLC get a loan for the balance. However, you are not allowed to personally guarantee the loan. It must be a non-recourse loan, which means that if your SDIRA LLC fails to make payments, the only recourse the lender has is against the property itself. Further, under UDFI (unrelated debt financed income) rules, there may be tax ramifications upon selling the property if the mortgage has not been paid off prior to the sale. For example, if you sold a property which was bought using 50% direct IRA funds and 50% mortgage monies, one half of the gain would be subject to UDFI at a maximum tax rate of 35%.  We recommend you contact a tax professional familiar with the SDIRA LLC regarding what IRS forms need filing.

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7: Can I be the property manager of the real estate?

A: That depends. With just a self-directed IRA the answer is no. However, with the SDIRA LLC you have the ability to manage the property, collect the rent and pay the bills. Unlike a SD-IRA, that put restrictions on what you can do, the SDIRA LLC structure allows you to perform maintenance on the property, advertise for renters, collect and deposit rent checks, pay the real estate bills, etc. This saves your SDIRA LLC a lot of money by not having to outsource this and helps provide a more comfortable and prosperous retirement for you. Note: You or a disqualified person can not be compensated for management services or provided residency.

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8: Can my SDIRA LLC make private loans to other individuals who want to buy real estate?

A: Absolutely (as long as they are not disqualified persons). With the current trend of banks lending to fewer people, this can be a great investment opportunity for your IRA. Because you control the terms of the loan, you can set your own interest rate and the loan can be secured by the assets of the borrower.

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9: Can my SDIRA LLC make loans to other businesses or companies?

A: Sure. Your SDIRA LLC can make a loan to any type of business. However, be aware that there are some restrictions on loans to any business that you or any other disqualified person has an ownership interest in. See: Disqualified persons.

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10: Why brokers and accountants say you can't do it.

A: They typically respond with, either out of ignorance or self-interest, “you can’t do that,” or, “it’s illegal,” or, “we don’t handle those types of investments,” etc. In all fairness, some of these professionals have never been told that it is legal to buy real estate and other non-traditional investments in an IRA. They don’t know because the companies that employ them are not interested themselves. Brokers are compensated when they sell stocks, bonds and mutual funds.  In short they are trained salesman.

In addition, many professionals, including CPAs, real estate attorneys, and financial planners, are not aware that buying alternative investments such as real estate with an IRA is perfectly legal. You might want to direct them to visit www.IRS.gov, the Internal Revenue Service’s own website and search for Publication 590, which defines everything the IRS wants you to know about IRAs. On pages 40-41, you will see what you CAN’T do. As mentioned earlier, you cannot purchase collectibles, life insurance contracts or stock in “S” Corporations.

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11: Why hasn't the self-directed IRA business been publicized?

A: Traditional IRA providers control about 97% of industry. Their huge marketing budgets allow them to maintain a strong public presence, although recently the national media is now giving more exposure to the SDIRA LLC service industry.

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12: How Can I determine if I’m making a prohibited transaction?

A: The Dept of Labor oversees interpretations of Prohibited Transactions. Under Presidential Reorganization Plan No. 4 of 1978, effective December 31, 1978, the authority of the Secretary of the Treasury (IRS) to issue interpretations regarding section 4975 of the Code (prohibited transactions) has been transferred to the Secretary of Labor (DoL) and the Secretary of the Treasury (IRS) is “bound by the interpretations of the Secretary of Labor pursuant to such authority.” You can contact the Dept. of Labor at www.dol.gov to read hundreds of interpretations they have already made.

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13: What is UBIT and how does it affect my SDIRA LLC?

A: UBIT is an acronym for Unrelated Business Income Tax which occurs when a plan generates income from operating a business, acquiring or improving property through debt financing (This type of UBIT is specifically referred to as UDFI - Unrelated Debt Financed Income), or certain partnerships from which the plan owns an interest. It is income generated by a trust when engaging in business activity that is unrelated to its general purpose.

UBIT was implemented to keep tax exempt / deferred plans that open businesses and the typical small business owners on an even playing field. If a plan or self-directed IRA was able to purchase a business and did not have to pay any taxes, it would be able to deliver an identical product at a discount. UBIT erases that risk for the typical business owner. UBIT can be a very complicated form of taxation. It is imperative you seek a CPA tax professional help to make sure you do not incur any tax penalties.

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