SDIRA and checkbook LLC

[David Thomas Wells]

My brother and law and I are going to use a combination of both of our IRA's to begin our real estate journey via a SDIRA in buying a house. One company does not want us to form and LLC, while most other companies seem to prefer setting up an LLC. I feel that I am getting deeper in a rabbit hole and want to set it up the right way the first time.

He will own 60% and I will own 40% and we will need a non-recourse loan to do so.

Any advice is greatly appreciated.

David

[John Underwood]

A check book controlled IRA requires an LLC.

[David Thomas Wells]

Sorry I may have worded it weird. The question is checkbook LLC vs just buying the property without checkbook control. We would use an online portal for ach payments.

[Dmitriy Fomichenko]

@David Thomas Wells,

Just buying a rental with a partner can be challenging, but the fact that you wish to use your IRAs to buy this rental will add an additional layer of complexity. It can work either way, but using Checkbook IRA will give you more control and simplify the operation. 

[Olia Fogel]

Self-Directed IRA owned LLC would be a great option for real estate investing. This way you will not need to seek the consent of a custodian to make a real estate investment or be subject to costly custodian account fees.

[Angie Menegay]

Quote from @Olia Fogel:

Self-Directed IRA owned LLC would be a great option for real estate investing. This way you will not need to seek the consent of a custodian to make a real estate investment or be subject to costly custodian account fees.

Hi Olia,
I have a SDIRA-owned LLC, and am looking to purchase the property. I'd like to have the LLC buy the property (instead of going through the SDIRA custodian process as you mentioned). Do I just sign the purchase agreement as the LLC and leave the SDIRA custodian out of the transaction?

[Ned Carey]

@David Thomas Wells this is a complex area. I would trust @Dmitriy Fomichenko But not so much other advice here. 

Consider that the non recourse loan may have tax iplicatons that negate much of the advantage of the IRA. holding a rental in an IRA is generally not the best use of a self directed IRA as a rental is somewhat tax advantaged anyway. @Dmitriy Fomichenko

[Dmitriy Fomichenko]

@Angie Menegay,

Yes, when you use IRA owned LLC the buy any investments, IRA custodian is not part of the transaction. You are the LLC manager would handle everything and sign all the documents.

[Angie Menegay]

Quote from @Dmitriy Fomichenko:

@Angie Menegay,

Yes, when you use IRA owned LLC the buy any investments, IRA custodian is not part of the transaction. You are the LLC manager would handle everything and sign all the documents.

Thank you so much for confirming! Now I'm really interested in moving my SDIRA to your company because I couldn't find any un-biased information on my custodian's website. I'll DM you for more info.

[Dmitriy Fomichenko]

Quote from @Ned Carey:

@David Thomas Wells this is a complex area. I would trust @Dmitriy Fomichenko But not so much other advice here. 

Consider that the non recourse loan may have tax implications that negate much of the advantage of the IRA. holding a rental in an IRA is generally not the best use of a self directed IRA as a rental is somewhat tax advantaged anyway. @Dmitriy Fomichenko

Ned, use of non-recourse financing in an IRA will result in some UBIT but it is far from negating the advantage of an IRA. After all, you are using Others People's Money (OPM or leverage) to acquire more than half of a real property but benefiting from 100% of the property. At the end with the right investment UBIT cost is very insignificant.

[Dmitriy Fomichenko]

Quote from @Ned Carey:

Holding a rental in an IRA is generally not the best use of a self directed IRA as a rental is somewhat tax advantaged anyway.

Ned, while generally this is correct, everyone's situation and scenarios are different and "buying or not buying a rental in an IRA" is not a one size fits all strategy. I personally prefer to do private lending using my retirement funds and own real estate personally for tax benefits. About 10 years ago I came across an attractive deal (fixer upper in Phoenix) that I would prefer to buy personally but did not have the funds available at the time. However I had funds in my Roth and used 60% non-recourse loan to buy this rental. Now, 10 years later, the property more than tripled in value, the rent more than doubled, and my tenants paid the loan down to $40K. I careless about not having tax benefits from this property (I was able to minimize my taxes almost to zero from other personal investments).