As a long time purchaser of tax certificates in various states and for various entities, I was wondering about the feasibility of utilizing an LLC for the sole purpose of bidding and assigning out certificates to various IRA's which would be my own and my families IRA's. This LLC would only do an assignment the same day of the tax sale to the various IRA's. The custodian would then fund the request for purchase directly to the county from the appropriate Equity Trust account and no money would ever change hands between myself and the county for purposes of purchasing the certificate. The LLC setup for the sole purpose of bidding and assigning the certificates then would be the only bidder card I would need to use and I could assign the certificates without my single member LLC ever taking actual ownership of the certificate. Would this scenario pass muster for the self dealing rule in a Roth? Yea or nay please give the reasoning behind your answer. Alternatively, would a checkbookIRA be a better idea so long as the only use for it would be to fund tax sale purchases from my and my wife's accounts? This question presupposes the county would allow the bidding with one bid number and then assigning out to the various entities directly after the sale.
If I understand your question yes this would be self dealing. You didn't say who would own the LLC doing the bidding. If it is you then you cannot assign to your IRA.
I could assign the certificates without my single member LLC ever taking actual ownership of the certificate.
I think you are on thin ice here. How can the LLC assign the lien if it doesn't own it? The fact you are providing the service of bidding is also likely a violation even if title is never in the bidding LLC.
While the IRS may have trouble discovering such a sham, I sure wouldn't put my entire IRA at risk for pure convienience.
@Ned Carey is correct - it is a prohibited transaction for your personally owned LLC to have any transactions with IRAs owned by disqualified parties - your parents, grandparents, spouse, children, grandchildren, spouses of descendants, among others. Technically, your LLC is "winning the bid" and this is certainly documented somewhere, as would be the transfer/assignment to the IRAs. There cannot be a purchase, sale or exchange of assets between disqualified parties when IRAs are involved. Internal Revenue Code 4975 spells out IRA disqualified parties and prohibited transactions, and the hefty penalties for engaging in them. Whether or not the IRS finds out, any reputable custodian will most likely not even accept these transactions to start with as they are clearly prohibited.
Your family members could simply purchase tax liens with their IRA funds, either using their IRA funds directly (if their custodian will agree to release funds to a third party escrow agent for the purposes of an auction) or via an IRA-owned LLC, which would give them "checkbook control". Any liens they purchase would then be reassigned to the name of their IRA (or IRA-owned LLC) by the county as the lienholder. There's really no need for a middle man. I work for a large SD IRA/Solo(k) custodian and we have clients who do this all the time.
I have been assigning certificates out to various end purchasers since the early 90's and those purchasers wired the money to cover those purchases directly to the county. However I have never done assignments to an IRA and was just wondering why it would violate the rule and/or its intent.
So the fact that I am traveling to the sale in my automobile with its accompanying cost, paying the registration fees if any, signing up to bid as a personal representative or agent of either the custodian or the IRA account, taking the time and effort to bid, and handling the customary work in dealing with redemptions, getting the deeds recorded and directing the custodian to pay those costs, and finally dealing with an attorney and agent to get clear title and the unredeemed property sold is not self dealing? I fail to see where being a facilitator for the simple act of bidding with no monetary gain to the single member LLC violates the intent of the self dealing rule. I certainly would not do this as a sham.
I do not want to go down the road of an IRA LLC at this time, but I do appreciate the thought.
It's prohibited because you are doing it for disqualified parties' IRAs. If a random stranger/friend had an IRA that wished to invest in tax liens, your company could provide all the services you describe above, and even charge them a 'facilitator fee'.
It's because it's your personal LLC having a transaction with the IRAs of disqualified parties (your own & family member's IRAs) that it becomes prohibited.
It would be the same scenario if your personally-owned LLC was a painting company. It would be prohibited for your or any disqualified parties to hire your painting company to paint their IRA-owned properties - even for free.
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing