Real Estate IRA LLC: Everything You Need to Know
A real estate IRA LLC is not any different than a traditional 401(k) IRA. 3 min read
Real Estate IRA LLC
A real estate IRA LLC is not any different than a traditional 401(k) IRA. The U.S. government created IRAs to allow investments to grow without taxation or tax-deferred compounded throughout time in order to maximize growth. The IRA can also qualify for annual tax deductions, but such a qualification would depend on the account. Also, IRAs protect assets, including assets that can be passed on to future generations.
A real estate IRA differs since it permits investment into real estate. Most IRA handlers allow certain investments, such as:
- Certain stocks
- Mutual funds
The IRS permits real estate to be held within retirement IRAs. Real estate investment within IRAs is allowed under the Employee Retirement Income Security Act. In addition, IRS rules allow you to enter into almost any real estate transaction investment, with the exception of investments involving disqualified individuals.
IRA Real Estate Deals
When it comes to real estate transactions, you must understand how important limited liability companies are to the process. An LLC is a legal entity where owners (members) have certain limited liability protections, meaning that they receive certain liability protections that are the same as a corporation. A real estate IRA LLC is also known as a Self-Directed IRA LLC. A real estate IRA LLC is a tax-court structure that’s approved by the IRS. In essence, it allows you to use IRA money to acquire real estate or engage in any investment type that’s tax free.
In addition, you don’t have to get the consent of custodians to make the real estate investment, or adhere to custodian account fees. To create a real estate IRA, the LLC is owned via the IRA, but managed by the IRA account holder, which is you.
A passive custodian moves the owner’s IRA money to the new IRA LLC. When you locate the right real estate investment, you may wire the money or write a check from the IRA LLC account to obtain the investment. The IRA LLC lets you avoid delays with IRA custodians, allowing you to act quickly to get the right deal in time. This is especially important in regards to tax liens or real estate investments because delays could result in a loss of the deal.
IRA Allowable Investments
The following is a partial list of allowable investment into real estate:
- Raw land
- Commercial or residential real estate
- Foreclosed properties
- Mortgage pools
- Tax liens
- Foreign real estate
- Vacation properties
- Rental units
In addition, you should be aware of the following process:
- Step One: The IRA account is created with an IRS-approved passive custodian. The custodian must also be FDIC supported.
- Step Two: Retirement money is moved to the new self-directed IRA account, and it’s tax free.
- Step Three: An LLC is created with IRA account holder (you) as the manager, and the IRA as the member.
- Step Four: At the insistence of the IRA owner, the passive custodian invests IRA funds into the new IRA LLC. One or more IRAs may fund the IRA, including Roth, SEP, and traditional IRAs.
- Step Five: The manager of the IRA LLC manages all, or a piece of, the IRA money held in the LLC bank account.
- Step Six: The LLC commences a real estate investment with IRA money and all gains and income flow back to the LLC, and it’s tax free.
Gains or income from the IRA generate tax-free profits. You may also make the investment tax-free and not have to pay taxes at the moment, or never in the case of a Roth IRA. Real Estate IRAs offer the chance to expand growth in a retirement portfolio while avoiding taxation. With a real estate LLC, you can take advantage of high growth in the real estate market and get the benefits of a tax free investment.
It is also a viable alternative to the stock market, especially if you are not comfortable with abrupt fluctuations in the markets. Moreover, real estate generates long-term investments that yield appreciation. Moreover, you have no limits on the property types that can be held under a real estate IRA.
If you have more questions on a real estate IRA LLC, submit your legal inquiry to our UpCounsel marketplace. UpCounsel’s lawyers have graduated from some of the best schools in the nation and will help you determine the best option for your IRA needs. Also, they will help you establish an LLC that allows you to invest in real estate via your retirement account.