Learn why the Real Estate IRA LLC may be right for you if you’re looking to buy real estate with your IRA.
The IRS (Internal Revenue Service) has always permitted IRAs to hold real estate. In this IRA Financial Group article, we’ll explain why you may want to buy real estate with your real estate IRA LLC.
What is a Real Estate IRA LLC?
A Real Estate IRA LLC is also known as a Self Directed IRA LLC with “Checkbook Control”. A Real Estate IRA LLC or Self-Directed IRA LLC with “Checkbook Control” plan is an IRS and tax court approved structure. This structure allows you to use your IRA funds to purchase real estate or make almost any other type of investment tax- free.
What Type of Real Estate Can You Purchase with a Self-Directed Real Estate IRA LLC?
You can make almost any investment with a Self-Directed IRA, or Real Estate IRA LLC. The IRC (Internal Revenue Code) doesn’t state what a Self-Directed IRA LLC can invest in. What it states is what the IRA cannot invest in. Additionally, the IRC prohibits you from engaging in certain transactions with a Disqualified Person. This differs from what the IRC prohibits you from investing in; below is a partial list of investments you can make with a Self-Directed IRA LLC:
- Raw land
- Residential homes
- Commercial property
- Apartments
- Duplexes
- Condos/townhomes
- Mobile homes
- Real estate notes
- Real estate purchase options
- Tax liens certificates
- Tax deeds
- Other hard assets including gold and precious metals, cryptocurrencies, hard money loans and more!
Learn More: The Basics of Real Estate Investing with an IRA
What are the Benefits of a Real Estate IRA LLC?
When you establish a Real Estate IRA LLC, you no longer need custodian consent to make real estate investments with your IRA. There is a “passive custodian“, which offers no financial advice. As a result, you no longer have to pay excessive custodian fees for transactions.
A Real Estate IRA LLC gives you complete control over the investments you wish to make, and the funds within your IRA. Because you have a passive custodian that offers no advice, you have more responsibility. So, it’s more crucial than ever to thoroughly research investment opportunities and understand them completely before you make an investment.
Why do Real Estate Investors Use LLCs to Invest in Real Estate?
Real Estate IRA LLC’s provide owners with multiple benefits. The main benefits of establishing a real estate IRA LLC include speed, flexibility, privacy, and costs. Establishing a real estate IRA LLC allows you to be the manager of the LLC. As a result, you will be given checkbook control and limited liability protections. If you invest in a real estate IRA without an LLC, you will need to go to the custodian every time you need to make a payment. A real estate IRA LLC eliminates this need by establishing checkbook control, giving you more control and the ability to get things done in a timely manner.
Establishing a real estate IRA LLC also provides investors with more privacy. Since investments are made in the name of the LLC, investors may not need to release their personal information. However, if you invest in a real estate IRA without an LLC, your personal information, including your name and account number will be on publicly available documents, including titles and deeds.
Finally, many investors use a real estate IRA LLC for its flexibility and speed. Real estate IRA LLCs provides an ease of partnering with others on transactions. Additionally, it is often simpler and faster to purchase properties in a real estate IRA LLC with partners than it is with a traditional real estate IRA.
Learn More: Using a Self-Directed IRA to Flip Homes
Do Real Estate IRA LLC’s Pay Taxes?
When you purchase real estate with a Self-Directed Real Estate IRA LLC, income and gains you generate with a pre-tax retirement account flow into the retirement account tax-free. Instead of paying tax on the returns of a real estate investment, you pay tax at a later date. As a result, the real estate investment can grow rapidly.
Typically, people make Self-Directed IRA real estate investments when they earn high income. And this is taxed at a higher rate. Withdrawals are made from an investment account when a person is earning little or no income and is taxed at a lower rate.
Learn More: Real Estate Investing with a Roth IRA Rules
What are the Other Benefits of a Real Estate IRA LLC?
- Positive cash flow is tax free
- IRA can borrow money – Leverage your investment with non-recourse financing
- Potential to earn a larger rate of return on invested capital
- Invest in what you know and understand
- Diversify your retirement portfolio from over-exposure to Wall Street
- Protect your retirement funds from inflation or a falling U.S. dollar
- Invest your retirement funds in hard assets
- Diversify your holdings with alternative assets, including cryptocurrency, precious metals and more.
Using Leverage with your Real Estate IRA LLC (Non-recourse loan)
You can utilize the Real Estate IRA LLC when making a real estate investment in cash. Additionally, you can use a non-recourse loan to fund an investment. A non-recourse loan is the only type of loan allowable for a Self Directed IRA.
A non-recourse loan is a secure loan (debt) that is secured by a pledge of collateral. The borrower is not personally liable. Whereas, a recourse loan is a loan for which the borrower is personally liable.
When using IRA funds, you cannot use recourse loans.
Note – if you use non-recourse leverage, the debt-financed portion of the investment will likely trigger a tax under the Unrelated Debt Financed Income rules (UDFI).
Gaining “Checkbook Control” is Quick & Easy
IRA Financial Group will take care of setting up your entire Real estate IRA LLC “Checkbook Control” structure.
Let’s begin today – we can handle the entire process by phone, email, fax, or mail. It typically takes between 7-21 days to complete, however the timing largely depends on the state of formation and the custodian holding your retirement funds.
Our in-house tax and ERISA professionals are on site and can greatly reduce the set-up time and cost.
More importantly, each client of the IRA Financial Group receives a tax professional to help with the establishment of the Self-Directed IRA LLC Checkbook Control structure. And our fees are lower than companies that perform similar or the same services.
The Real Estate IRA LLC “Checkbook Control” Process
Let’s take a look at the process in four easy steps.
First: A Self-Directed IRA account is established with an IRS approved and FDIC backed passive custodian.
Second: Retirement funds are transferred to the new Self-Directed IRA account tax-free!
Third: A Limited Liability Company (LLC) is formed with the IRA account owner designated as Manager and the IRA as owner (member) of the LLC.
Fourth: At the direction of the IRA owner, the passive custodian invests the IRA funds into the new IRA LLC. There can be one or more IRAs to fund the IRA, including Traditional, Roth, and SEP IRAs.
STEP 5: The Manager of the new IRA LLC (the IRA owner) directs all, or a portion, of the IRA funds held in the new LLC bank account for investment.
STEP 6: The LLC makes a real estate investment using IRA funds and all income and gains generally flow back to the LLC tax-free!
Read More: What Can I Invest in With a Self-Directed IRA.
Get in Touch
Ready to open your Real-Estate IRA LLC? You can start the process directly from our app or online. Do you still have questions about the real estate IRA LLC or real estate investing with a Self-Directed IRA that weren’t covered in this article? Contact IRA Financial Group at 800-472-0646. Or fill out the form to speak with an IRA specialist.
Did you know?
You can use leverage for a Self-Directed IRA real estate transaction, but you must be aware of the UBTI rules.
