LLC in ROTH IRA

[Guest Gerry]

I have found several sites on the web that are promoting the idea of using your self directed IRA to invest in a newly formed LLC, of which you would be the managing member.(www.phoenixspirit.com, www.guidantfinancial.com) There by having checkbook control of the assets of the LLC. So you could make investments by simply writing a check, instead of jumping through the hoops of the IRA custodian and incurring extra fees for each investment.

 

These people want big bucks to setup one of these. Are you familiar with this and can this be done on the cheap?

[Dave T 0]

Sorry, but I am not overly fond of IRA investment strategies as a tax avoidance device when you are investing for current income. There are too many pitfalls to trap the unwary investor which will end up costing more in the long run than the taxes that would be saved. One pitfall is operating an active business within the IRA. This brings Unrelated Business Income Taxes into play at tax rates higher that the taxpayer would have paid by operating as a sole proprietor or from within a Subchapter S corporation.

 

That said however, if you already have a self-directed IRA in place, there is an approach to real estate investing within the IRA that I feel achieves the investor's objectives of long term, tax deferred growth within the IRA.

 

Form a limited partnership and sell shares in your partnership to your IRA. Now the partnership uses the funds from the sale of its limited partnership shares to invest in real estate on a short term basis. When the property is sold, the income from the sale is distributed to the partners (amount of distribution depends upon the number of shares owned). Now, the income to the IRA is tax deferred until withdrawn.

 

This approach seems to keep the IRA and the business operation at arms length, yet still shelters the income from current taxes. This strategy is not suited for use by the IRA unless the IRA can completely fund the investment in the limited partnership from within the account. Additionally, if current cash or income is needed, then early withdrawal penalties and income taxes on the withdrawal don't encourage use of the IRA as an investment vehicle.

[Mark in St. Louis 0]

Dave,

 

Here is another way that investors I personally know have been doing it for several years.

 

They set up a self-directed Roth IRA with Mid Ohio Securities as the custodian. Every single one of them use Mid Ohio. They apparently specialize in doing this for real estate investments. It's their primary niche. Web site is HERE.

 

Anyway, what they do in a lease purchase transaction is have the IRA put up the $10 or $100 as option consideration when buying from the seller. That way the IRA (with their LLC as benefactor) owns the option.

 

All revenue then flows into the self-directed Roth IRA....up front option consideration, monthly payment spread from tenant-buyer, and back end money from purchase.

 

They have told me that Mid Ohio can even offer collection services for rent and that their initial setup fee is pretty reasonable. I haven't personally checked though.

 

What do you think of this scenario Dave?

[Mr Saint 0]

Mark,

 

I've got a 401K from a previous job that I need to do something with. This sounds like just the thing. Tax deffered self directed retirement through real estate...thanks for the tip.

[Mark in St. Louis 0]

Mr. Saint,

 

I just noticed that they have changed their name and web site to Equity Trust Company.

 

Here is link from their site that specifically address a rollover from a 401k.

 

Click Here

The local real estate investors I knbow here in St. Louis really praise this company for their knowledge and simplicity. I personally have not used them so this is not a direct endorsement from me.

 

You'll notice from their web site that they seem to keep on top of everything.

 

Also, I was told that the founder/owner of the company (and his family) is a long time real estate investor himself.

[tgaspard 0]

Mr. Saint

 

That was pretty much a question I had a while back - "Could one do a sandwich lease/option in a self directed IRA?" What I would be really interested in know is if they had to pay "Unrelated Business Income Taxes" in there IRA.

 

I understand that the percentage of leveraged funds would get taxed as "Unrelated Business Income Taxes". But as you know a sandwich lease option is pretty much a flip - you have no borrowed funds at all. So my thinking, which could be 100% wrong, is that there would be no "Unrelated Business Income Taxes". I'm just not sure but would love to find out the answer.

 

If you could find out if those investers are doing those transaction in their IRA without paying any "Unrelated Business Income Taxes" that would be GREAT news for all of us. I'd open an account tomorrow if that was the case.

 

Can you find out?

 

Todd

[tgaspard 0]

I'm sorryt Mr. Sain, I was addressing Mark in St. Louis in the last post!

[Mark in St. Louis 0]

Todd,

 

I got a hold of one of the investors but he doesn't do any lease-purchase deals.

 

He is a rehabber and does rehab jobs inside his Roth IRA. The Roth IRA buys the property (deeply discounted of course), pays for repairs, and realizes the profit from the retail sale of the property.

 

My understanding is that since it's a Roth and is NOT a "non-allowable" investment vehicle, all net profits are 100% tax exempt.

 

That's the way he explained it to me.

[Mr Saint 0]

I'm sorryt Mr. Sain, I was addressing Mark in St. Louis in the last post!

Mr. Saint...St. Louis...easy mistake...

 

...hey, my dad's name is Louis...eerie

[Dave T 0]

I understand that the percentage of leveraged funds would get taxed as "Unrelated Business Income Taxes".  But as you know a sandwich lease option is pretty much a flip - you have no borrowed funds at all.  So my thinking, which could be 100% wrong, is that there would be no "Unrelated Business Income Taxes".  I'm just not sure but would love to find out the answer.

Todd,

 

As I understand a sandwich lease option arrangement, you exercise your option to purchase when your tenant buyer exercises his option to purchase from you. This requires a double closing.

 

Now, I agree that this is just a flip, but the flip has to be financed somehow for you to complete the settlement. If the money is not coming entirely from within your IRA, then you have external financing involved.

 

Additionally, I continue to maintain that engaging in sandwich lease options is operating an active business. The operation of a business within the IRA may also bring UBIT into play.

 

One other question to ask: If you find a way to make it all work and if the IRA is funding the deal then doesn't the IRA custodian (or trustee) have to sign all contracts, as well as disburse and receive funds? You may be giving direction to your self-directed IRA custodian, but doesn't the custodian have to be a party to the deal as your trustee.

 

The best source of information to answer all your questions is your IRA custodian. I am sure that the IRA custodian has dealt with these questions many times and is well versed in the laws on this issue.

[tgaspard 0]

Now, I agree that this is just a flip, but the flip has to be financed somehow for you to complete the settlement. If the money is not coming entirely from within your IRA, then you have external financing involved.

 

I think I understand what your saying Dave but, "How would UBIT be calculated on a sandwich deal when you have no other fiancing involved?" But now that I think more about it, maybe this would be seen more as flipping a contract than flipping property. In that case it might not be allowed at all

 

You have another good point about being "active". If anything kills this idea of doing sandwich deals in an IRA it is probably this point.

 

I'll try to give them a call next week and report back as to what they tell me.

 

Todd

[tgaspard 0]

FYI

 

I called them and was having trouble getting through so I shot them an email. Here is the reply I got - its pretty creptic and not complete I must say. Maybe I'll try to get through another time

 

Todd,

    It is possible for an IRA to purchase or invest into a lease option.  Do keep in mind that in order for an IRA to hold an asset money must come from the IRA to purchase the asset.  Please refer to our website www.trustetc.com for detailed information regarding "Investment Options".  You may also want to look into our affiliate website www.irareg.com

 

I had some specific questions including UBIT taxes but they wern't answered. The bad thing about waiting for them to pick up the phone is that it is not a 1-800 number

 

Todd

[jpschubbs 0]

'Gerry' date='Jan 2 2004, 09:36 AM' post='5335']

I have found several sites on the web that are promoting the idea of using your self directed IRA to invest in a newly formed LLC, of which you would be the managing member.(www.phoenixspirit.com, www.guidantfinancial.com) There by having checkbook control of the assets of the LLC. So you could make investments by simply writing a check, instead of jumping through the hoops of the IRA custodian and incurring extra fees for each investment.

 

These people want big bucks to setup one of these. Are you familiar with this and can this be done on the cheap?

 

 

Hey Gerry,

I've done some searching as well. In fact I actually set one up. It was with a company called Checkbook IRA. I searched over and over and over, Guidant was something like $4K, but the guy I went through did it for $2,500. I was really impressed with his site, and talking to him I can tell he's one of those guys who is not just a suit. He's done plenty of real estate deals, he's also involved in quite a few other investments.

 

On the subject of getting it cheap. I actually had my attorney quote me a price to set all this up and the quote came in a $9,300. Come to find out it's the legal legwork that must be done in making sure that the wording in the LLC's operating agreement matches and falls in line with IRS tax code. Considering that I decided it was best to leave it to the boys that do this for a living. It seemed like a good price.

 

I would check out as many sites as I could, but in the end I did check all the sites and I would reccomend the guys at Checkbook IRA. Their website is Checkbookira.com.

 

Hope this helps

Jpschubbs

[etz420 0]

Funding an LLC with your self directed IRA is not as complicated as you think. The LLC has to be set up base on the Swanson case. Here is an article that speaks about setting up an LLC with your IRA

 

http://www.entrustcama.com/iraplus/ira-ins...ugh-entity.sqrl

 

Etzion

[silas 0]

Thank you for such valuable information, I have started to look into this last week and as I asked around very few people have heard of this.

 

 

Sorry, but I am not overly fond of IRA investment strategies as a tax avoidance device when you are investing for current income. There are too many pitfalls to trap the unwary investor which will end up costing more in the long run than the taxes that would be saved. One pitfall is operating an active business within the IRA. This brings Unrelated Business Income Taxes into play at tax rates higher that the taxpayer would have paid by operating as a sole proprietor or from within a Subchapter S corporation.

 

That said however, if you already have a self-directed IRA in place, there is an approach to real estate investing within the IRA that I feel achieves the investor's objectives of long term, tax deferred growth within the IRA.

 

Form a limited partnership and sell shares in your partnership to your IRA. Now the partnership uses the funds from the sale of its limited partnership shares to invest in real estate on a short term basis. When the property is sold, the income from the sale is distributed to the partners (amount of distribution depends upon the number of shares owned). Now, the income to the IRA is tax deferred until withdrawn.

 

This approach seems to keep the IRA and the business operation at arms length, yet still shelters the income from current taxes. This strategy is not suited for use by the IRA unless the IRA can completely fund the investment in the limited partnership from within the account. Additionally, if current cash or income is needed, then early withdrawal penalties and income taxes on the withdrawal don't encourage use of the IRA as an investment vehicle.