Checkbook IRA vs Custodian IRA which do you like for real estate?

Question

I am trying to stay out of tax trouble, but at same time prefer a cost effective, somewhat convenient method of real estate acquisition within a self directed IRA, after my Roth conversion. Looking for direction from my more experienced bigger pockets members. Thank you in advance.

Ginny Carl · Answer

Thanks @George Blower. We do hold title in our LLCs. What will be interesting for LLCs in general is some of the proposed tax legislation on pass-through entities and how that may affect all of us who utilize LLCs. Appreciate all the comments!

Rita Medeiros · Answer

Thank you all for your insightful & informative comments.

George Blower · Answer

@Ginny Carl

That would be a possible way to invest. You could both pool your funds int the same LLC and then invest in real estate through the LLC.  An LLC is often used to pool investor funds so that title is taken in the name of the LLC.

Scott Krone · Answer

@Brian Eastman is spot on with regard to self dealing.  @Rita Medeiros if your goal is to stay out of tax troubles, then this is the key area to focus your attention.  Most IRA companies will not allow you invest your IRA money in an asset you control.  That is why our investors like our self storage investments.  They are active real estate investors, have the IRA's but can't invest in their own deals.  Our products meets their goals, and they can invest in them as their is no "self dealing."  Self dealing typically includes spouse, kids, parents, grandparents, etc.

Ginny Carl · Answer

Thank you @Brian Eastman for this thorough explanation. I've been wondered about a self-directed IRA myself as we ramp up our real estate investments. Since we (my brother and I and a partner) are interested in raw land investing, it sounds like the self-directed IRA may be one possible source of funds.

Brian Eastman · Answer

@Rita Medeiros

To some degree, it depends on what you mean by "real estate".

An IRA account held by a custodian is good for static assets that do not require a lot of transactions or anything of a time-sensitive nature.  You are reliant on the custodian to sign all documents, issue payment for expenses and receive deposits.  Since real estate transactions are unique by nature, this means human beings moving paper (in digital form, but still manual processing).

Direct ownership of real property is not static.  Things happen that require quick turnaround, and there is a pretty frequent flow of expense and income transactions.  As such, the services of a custodian for all but the most static real estate holdings (raw land, shares of a partnership that holds property - managed by a 3rd party, etc.) is a real inefficiency in terms of paperwork, delays and per-transaction or per-asset fees.  And be ready to pay additional fees for anything that needs to be expedited.

... and despite what the marketing literature tells you, read the fine print on any processing forms and you will see that the custodian does not provide oversight of your transactions with respect to IRS rules.  If you provide the paperwork to execute a transaction, they will execute the transaction.  Sure, they will catch something obvious like trying to write a check to yourself to reimburse yourself for a check you had to write to get a plumbing emergency handled - but but that point it is already a violation anyway.

By contrast, the Checkbook IRA LLC (or Solo 401k for those who have qualifying self-employment) puts you in direct control of all transactions.  You will hold the IRA funds in a business checking account of your choosing in the name of the IRA-owned LLC and will not need to rely on 3rd party processing to get things done.  You can act on opportunity or emergency immediately simply by signing a contract, writing a check, wiring funds, etc.

While the IRA LLC is generally more expensive to establish due to the legal and consulting work involved, it should save you considerably in terms of time and money over the use of the plan.

In both models, you need to be very much aware of the IRS rules against self-dealing or dealing with disqualified parties.  When you work with a quality IRA LLC provider, you should have access to knowledgeable support.

Several such providers of both plan types are active here on BP.  Get on the phone and ask questions and see how responsive and knowledgeable folks are.