Selling my investment home to LLC which is owned by my IRA

5 Replies

Hello Tax experts,

I am california resident and I own one investment property in southern california which is cash positive with good equity. To be precise, i had purchased this property for $405K in 2014 and now market value could be around $550K. I do get good rent which makes me cash positive $300 every month.I have $280K mortgage on this property with 4.125% interest of 26 years remaining.

My wife and I, have about $280K in our IRA and i am thinking to invest this money to purchase property via LLC. So one thought came to my mind was, Can i sell my investment property to my IRA LLC for $280K ? Will it be legal transaction because I am selling it for less than current market value? What is the risk?

Doing this, all profit from rental income will grow in IRA where I will have to pay taxes upon withdrawal after retirement. I don't have to worry about showing profit and loss, each year during my personal tax filling. is this correct assumption?

Is it legit to sell property below market value? Is it legit to sell property to your own IRA - LLC ?

Thank you for advise.

IRS forbids "self dealing". I would check with whoever handles your IRA and make sure they understand these rules. IMHO it sounds like a prohibited transaction. In other words one cannot profit from ones own deals - has to be an uninterested third party.

@Naresh Hanchate

Such transaction would result in a prohibited transaction.

Certain transactions between an IRA and its owner or an IRA and a "disqualified person" are specifically prohibited by law.

A prohibited transaction is a transaction between an IRA and a disqualified person that is prohibited by law.

The transaction that you are describing would run afoul with some or all of the following prohibited transaction rules:

Prohibited transactions generally include the following transactions:

  • a transfer of IRA income or assets to, or use of them by or for the benefit of, a disqualified person;
  • any act of a fiduciary by which IRA income or assets are used for his or her own interest;
  • the receipt of consideration by a fiduciary for his or her own account from any party dealing with the IRA in a transaction that involves plan income or assets;
  • the sale, exchange, or lease of property between an IRA and a disqualified person;
  • lending money or extending credit between an IRA and a disqualified person; and
  • furnishing goods, services, or facilities between an IRA and a disqualified person.

https://www.irs.gov/irm/part4/irm_04-072-011

https://www.irs.gov/retirement-plans/retirement-pl...

Naresh,

Do you already have an IRA LLC or just considering setting one up? If you have one setup already and you don't know the answer to the question you asked - whoever helped you set this up did horrible job educating you on how to use it. This is very basic question that every self-directed IRA investor must know - no transaction is allowed for an IRA with "disqualified person". 

Another inaccuracy in your statement is when you said "my wife and I have $280K in our IRA". The is no such thing as "our IRA". The IRA is either yours or your wife's. Or you might have "our IRAs" (one of you and separate one for your wife). IRA = individual retirement account. All IRA are 'individual'. If each of you have a separate IRA - you can't combine them into single self-directed IRA, you must setup two separate self-directed IRA, one for you and one for your wife. The only instance when you can combine your IRA with your spouses's IRA is when your spouse passes away and you inherit IRA from your spouse. Inherited IRA from a spouse can be rolled over into your personal IRA, other than that there is no way to combine spousal IRAs into one. It is possible however to invest two separate IRAs into one LLC and then make a single investment with that, however does come with it's own complexity and may or may not make sense for you, so be sure to seek guidance of an experienced professional if that is what you wish to do.

Hope this helps.

Thanks @Dmitriy Fomichenko    When I meant our IRA , I meant to  invest two separate IRAs into one LLC and then make a single investment. Thank you for your explanation. I am still working on property selection which will fit into my $280k budget so I can open LLC for investment. 

Originally posted by @Dmitriy Fomichenko:

Naresh,

Do you already have an IRA LLC or just considering setting one up? If you have one setup already and you don't know the answer to the question you asked - whoever helped you set this up did horrible job educating you on how to use it. This is very basic question that every self-directed IRA investor must know - no transaction is allowed for an IRA with "disqualified person". 

Another inaccuracy in your statement is when you said "my wife and I have $280K in our IRA". The is no such thing as "our IRA". The IRA is either yours or your wife's. Or you might have "our IRAs" (one of you and separate one for your wife). IRA = individual retirement account. All IRA are 'individual'. If each of you have a separate IRA - you can't combine them into single self-directed IRA, you must setup two separate self-directed IRA, one for you and one for your wife. The only instance when you can combine your IRA with your spouses's IRA is when your spouse passes away and you inherit IRA from your spouse. Inherited IRA from a spouse can be rolled over into your personal IRA, other than that there is no way to combine spousal IRAs into one. It is possible however to invest two separate IRAs into one LLC and then make a single investment with that, however does come with it's own complexity and may or may not make sense for you, so be sure to seek guidance of an experienced professional if that is what you wish to do.

Hope this helps.