IRA Real Estate LLC: Everything You Need to Know
IRA real estate LLC is a type of limited liability company often used by investors to purchase real estate.3 min read
What Is an IRA LLC?
IRA real estate LLC is a type of limited liability company often used by investors to purchase real estate. This type of LLC provides the holder of an IRA (individual retirement account) with completing signing authority over the retirement funds in the account, which allows them to quickly access their funds if a competitive real estate opportunity arises.
To set up an IRA LLC, you'll need to create:
- Articles of organization for your LLC
- An EIN (employer identification number), is obtained for free from the IRS
- A business checking account in the legal name of the company
After creating the LLC, you name the IRA as the sole owner and yourself as the manager. The IRA funds are then deposited into the business checking account with you in control of the funds.
If you're considering creating an IRA LLC for your real estate company, talk with your tax attorney to make sure this is the right choice for you. Certain prohibited transactions, such as purchasing stock in S corporations, collectibles, or insurance, can lead to the IRA funds getting taxed as of the first day of the year in which the transaction in question occurred.
Using a Self-Directed IRA LLC to Purchase Real Estate
Most people think that need to invest their IRA funds in stocks, mutual funds, or certificates of deposit. However, the Employee Retirement Income Security Act (ERISA) also allows real estate investments. IRS rules also allow you to invest IRA funds in tax liens, bonds, gold, and even cryptocurrency such as bitcoin.
Almost anyone who has income can set up an IRA. Large financial institutions typically recommend investing IRA funds in mutual funds, stocks, or bonds due to the profitable commissions they receive. Self-directed IRAs, on the other hand, have become much more common over the past several years due to significant media coverage of self-directed IRA investments by Forbes, the Wall Street Journal, and other publications.
McKinsey & Company has reported that by the end of 2011, funds in alternative investments such as real estate and cryptocurrency reached $6.5 trillion, with a five-year growth rate more than seven times higher than that of more traditional investments. Even institutional investors have an estimated 28 percent of their portfolios dedicated to alternative investments, and this amount is ever-growing.
Advantages of Purchasing Real Estate Through a Self-Directed IRA LLC
Benefits of this type of business entity include:
- Profits generated by IRA investments are not taxed until distribution. It allows the real estate investment to grow without the hindrance of taxation.
- No time limit exists for holding property.
- The IRA can take advantage of non-recourse financing.
- You can earn a much higher rate of return on invested capital than with traditional investments.
- You can diversify your investment portfolio, which protects against inflation while building a business in property investment.
- The ability to withdraw funds from the IRA when you are no longer working and thus taxed at a lower rate
Types of Real Estate Investments
An IRA LLC allows you to invest in both domestic and foreign real estate, including but not limited to residential homes, undeveloped land, commercial property, duplexes, apartment buildings, townhomes, condominiums, real estate notes or purchase options, mobile homes, tax lien certificates, and tax deeds.
This business entity allows you to buy tax liens and foreclosures immediately, generating tax-free profits. You can also purchase your future retirement home and enjoy rental earnings until you move in tax-free after age 59.5. The same strategy can be used to buy a vacation home or office building.
Tips for Purchasing Real Estate Through an IRA LLC
The procedure for buying property with a self-directed IRA LLC is similar to purchasing a personal real estate. After you find an investment property, you can purchase it directly with the funds in your business account. All paperwork should be in the legal name of the LLC. The LLC manager must sign all documents related to the purchase. You can then deposit the income from the property into the LLC bank account.
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