I have a similar question. My business partner and I would like to buy an investment property through an LLC and using our soon to be formed self directed IRAs.
Here's our thought:
Each partner fund a SDIRA. Use those funds to invest in a note from our newly formed LLC. This LLC will pay interest or interest and principal back to the IRAs as part of the note. The LLC will take the note proceeds and along with leverage (mortgage) buy a cash flow property. The property will pay back the note to the IRAs. We are thinking about using Quest for our SDIRAs.
Does anyone see any issues? @Brian Eastman or any other experts? Our main goal is to avoid UBTI/IRS rules around IRAs investing in real estate. We have a good cash flow target property so this will not be a flip. What else should we be thinking about? Any recommendations for a good CPA/tax advisor in this realm? thanks in advance!
You cannot do what it sounds like you are describing.
If the LLC is owned by your and your partner personally, it would be a disqualified party to the IRA accounts and they could not transact with the LLC in any way.
The two IRA accounts could either form a LLC together and use that LLC to purchase property, or they could just vest title to the property as tenants in common. The LLC would have some advantages in terms of unification and transactional simplicity, but would have to file a partnership tax return at the state and federal levels, which might be eliminated with a joint venture between the IRA accounts.
If there is debt financing such as a mortgage used to acquire property, then the underlying IRA accounts will have potential exposure to UDFI taxation. This tax is not a deal killer, just something you need to understand and factor into the equation.
@Brian Eastman wow, thanks for the quick reply!
Hmm, we need the leverage/mortgage to buy the property. We were hoping to combine the dollars in our IRAs for the down payment on that property. Let's call the property $200k and we need 30% down so we use $60k from our IRAs for the down payment. Maybe my question is then: what's the best and simplest way to structure this?
@Mark Nolan thanks for the IRS link! fascinating reading! : )
The IRA accounts could form a new LLC specifically for this property, where each of the IRA accounts is a member. You and your associate could be non-owner managers and administer the LLC. The LLC would be the borrower on a non-recourse mortgage, and the IRA's would have exposure to UDFI taxation. The LLC would have a single bank account for handling the investment. The LLC would need to file a partnership return at the state and federal levels. The feds would recognize the IRA ownership and no tax on income would be expected (other than the separate UDFI tax at the IRA level). Not all states follow the federal model, and may want to tax the partnership regardless of the fact that the partners are IRA accounts. Check with your licensed tax advisor familiar with the laws of your state.
Alternately, the two IRA accounts could simply vest title to the property as tenants-in-common. The IRA accounts would then be join borrowers on the note.
This will be more complex at the day-to-day level, but will eliminate some of the tax reporting requirements that would come with a LLC. Of course, the LLC will also provide a layer of liability protection to the IRA accounts they would not have with a direct investment.
If you intend to make multiple investments, a better approach would be for each of you to establish your own self-directed IRA LLC. These single-member LLC entities would not have tax filing requirements at the state or federal level. The two LLC entities could then join-venture into various properties. This would give you much more transaction control than working directly through the custodian, but also provide more flexibility for multiple deals - some of which may be with other partners, or at different equity splits than the first property.
Here is another option.
If you and your partner are both self employed in the same business, you can open a solo 401(k) plan under the partnership.
You can both participate in the same solo 401(k) plan; therefore, you can transfer your respective IRAs to the solo 401(k) plan and invest in real estate.
If you proceeded in this fashion, the solo 401(k) can obtain a non-recourse loan and it will not subject the solo 401k to UDFI. UDFI does not generally apply to solo 401k plans but does to IRAs. This is one of the main differences between an IRA and a solo 401k plan.
Be sure to use a CPA knowledgeable with real estate investing using IRA to guide your through UDFI
HI All, Is there a way to do this if my IRA only owns 49% of an entity? So my IRA owns 49%, my partner's IRA owns 49% and another investor owns 2%? Does this get us past the self dealing? My thought is to buy an investment property with my IRA but then have some other interested entities be involved (prop mgmt, etc) so I run into some self dealing issues. And my prop mgmt company is required for this to be a good deal. Does this work? Thanks!
Simply put, either your IRA or your property management company participates, but not both.
If you try to use your property management company where your IRA is the owner, you will certainly be creating some kind of direct or indirect benefit between the plan and a disqualified party. There is no "workaround".
Thanks @Brian Eastman ! I'm still learning!
Does anyone have any recommendations for CPA's in Washington State that are up to speed on Self Directed IRA's? I am also curious about Solo 401K usage @Minna Nah .
Specifically, if you are to utilize a solo 401K, does your business have to be your sole source of income? If I have a 9-5 job, could I start a 401K for my real estate business, contribute to that, then convert some of my IRA to an SDIRA and then dump it into my solo 401K for my real estate company?
One other SDIRA question I came across:
If I am only 49% owner of a company, can I then use my SDIRA to invest in that same company? Would that keep me from being disqualified?
@Brendan Harrison I have a saavy CPA, I just established my SD IRA so he hasn't done my books since establishing, but he knows real estate and business. He's located in Bellevue and if you message me I can get you his contract info. You could at least pick his knowledge on your questions above.
Secondly no, you cannot use SD IRA funds to invest in a company you have ownership of.
@Brendan Harrison To have a Solo 401k, you need to have a self employed business activity, but it doesn't have to be your sole income. You can have a full time job (with a regular 401k with an employer), and a side business with a Solo 401k. However, you can only contribute to the Solo 401k with income from a business. Your 9-5 income, for example, cannot be contributed to the Solo 401k. If you have an old 401k from a previous job, or an IRA, however, you can rollover the fund into the Solo 401k.
Even if your ownership of a company was small enough for that company to technically avoid being a disqualified person to your IRA, it could still be a prohibited transaction. What you describe would likely be seen as "self-dealing" and thus, prohibited.
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