How Does an IRA LLC Work?

A limited liability corporation is a legal entity in which owners classified as members enjoy the benefit of protection of their personals assets against business debts. Some IRA investors use the strategy of creating an IRA LLC to purchase real estate.

IRA investors utilize this strategy as a way to allow them to obtain quick and easy access to their IRA funds to take advantage of a real estate deal and be able to act fast in a competitive market. When creating an LLC owned by an IRA, you will need to create or obtain:

  • A business checking account that has been set up in the name of the company
  • A tax ID or EIN that can be used for IRS tax purposes
  • Articles of Organization for the LLC that have been created and filed with the local Secretary of State office

Once the LLC is formed, use the business checking account to receive your IRA payments and purchase the real estate. You then need to designate yourself as the managing member to give you access to the checkbook and control over business funds so you can complete the real estate transactions. Once established as a legal LLC, you may begin purchasing assets. However, before starting, seek the advice of a lawyer and tax advisor to avoid penalties or complications.

The Benefits of Using a Real Estate IRA LLC

The many reasons that investors choose to form an IRA LLC to make real estate purchases include:

  • You are able to avoid some of the transaction fees and check writing fees that can occur with using a self-directed IRA.
  • Once you have found the real estate property you want, you can immediately write a check. You do not have to fill out paperwork and gain approval from your IRA before you can move forward with your transaction. Such expediency can be especially important in a competitive real estate market.

When performing these transactions, please note that you need to make sure you avoid a prohibited transaction or you could possibly lose your tax-favored IRS status. If a prohibited transaction is found, you could face tax liability dating back to the first of the year that the transaction occurred.

How to Purchase a Property with an IRA LLC

When deciding to purchase property with your IRA LLC, you must be sure that the transaction meets all the rules set forth by the IRS and Department of Labor.

  • When LLC debt finances a property, you must pay UDFI tax using a Form 990-T.
  • Dividends from the LLC must be distributed to the members based on the owner percentages outlined in the company's Operating Agreement.
  • The LLC must have been created with the proper structure.

What is a Self-Directed IRA LLC and How Does it Work?

A self-directed IRA LLC is a limited liability company that sets up an investment strategy for your future retirement and functions similarly to a traditional IRA. When setting up the IRA, you can manage it, submit reports, issue statements, and provide regular update status for funds or you can assign a custodian or trustee. You can create an IRA LLC for yourself or join with one or more partners or investors.

Requirements of a Self-Directed IRA LLC

While a 401K can originally be set up with the ability to write checks, a self-directed IRA LLC is usually required to provide check writing ability over a traditional self-directed IRA. If the IRA LLC is owned by a single member, the LLC is not required to file a federal tax return. A self-directed IRA LLC is only required to file a Form 990T tax return if it owes taxes such as UDFI or UBIT taxes.

Tax Requirements For a Self Directed IRA LLC

While the IRS provides all of the requirements for qualifying IRA accounts, your processing and required fees are set forth by the state in which you form the IRA LLC. While there is no specific detail from the IRS as to what an IRA LLC investment can consist of, the IRS does prohibit investments through Sections 408 and 4975.

If you need help with forming an IRA LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.