Murray Hill, NJ · Member since 2008 · 204 posts · 15 votes
Hi. I currently do all my real estate investing through my Self-Directed IRA LLC. Consequently, I don't need to report my income since it all goes back into the IRA. Up until now, I've been investing on my own, but I'm considering partnering with someone on a flip. Initially my thought was that we would form a new LLC for the duration of the flip, and that my Self-Directed IRA LLC would own 50% of it, and he (or his entity) would own the other 50%.
My question is, how would this effect my tax situation, if at all, and what extra filing would I need to do with the IRS? Also, assuming that we dissolve the LLC after we flip the property, who does the filing, and is it done at that time or in April with the rest of my tax return(s)? Obviously I'm a little confused about this. Any experienced guidance would be greatly appreciated.
Your IRA LLC and the partner can joint venture and vest title as tenants-in-common.
Your IRA LLC and the partner can form a LLC for the project.
There are advantages and disadvantages to both approaches. Best to speak with an attorney for the specifics relative to your intended transaction and state.
If you form a partnership LLC, that LLC will need to file a federal partnership return and likely a state return as well. The K-1 to your IRA LLC will go in a file drawer at the federal level. Some states tax partnership income even if the partner is exempted.
If the project is a flip, and you do this on a regular or repeated basis with your IRA LLC, then the IRA has exposure to UBIT. Speak with your IRA LLC provider and/or your CPA on that topic.
Your IRA LLC and the partner can joint venture and vest title as tenants-in-common.
Your IRA LLC and the partner can form a LLC for the project.
There are advantages and disadvantages to both approaches. Best to speak with an attorney for the specifics relative to your intended transaction and state.
If you form a partnership LLC, that LLC will need to file a federal partnership return and likely a state return as well. The K-1 to your IRA LLC will go in a file drawer at the federal level. Some states tax partnership income even if the partner is exempted.
If the project is a flip, and you do this on a regular or repeated basis with your IRA LLC, then the IRA has exposure to UBIT. Speak with your IRA LLC provider and/or your CPA on that topic.
Thanks for the quick response. You mentioned that if I "do this on a regular basis" that I might be exposed to UBIT. I'm not sure what you mean by "this". Do you mean flipping on a regular basis, or flipping with a partner on a regular basis? And why would it constitute unrelated business income if it's all going back into the SD IRA?
When a tax-exempt entity such as an IRA engages in a trade or business activity on a regular or repeated basis, UBIT tax applies. The purpose of the tax is to level the playing field for taxpaying businesses, so that they are not driven out of business by tax-exempt competitors.
Flipping is a trade or business activity, as opposed to passive income such as rentals or hard money lending. The IRA has exposure to UBIT whether it flips independently or does so in partnership with another investor.
An IRA is an IRA. How it is configured to invest does not change the tax rules.
UBIT applies to any IRA, when it engages in a trade or business activity.
Your Checkbook IRA LLC provider should have brought this topic up and included information on the topic in any instructional guides they provided. If they did not, please give the BP community a heads up so we'll know who to avoid.
Professional · Bothell, WA · Member since 2016 · 89 posts · 17 votes
9y
@Dave Versch, I have helped several clients with this type of structure. You have two issues. One is the accounting of the sub structure. Many locations have issues with an LLC as a joint tenant so you might be better off with forming a project LLC for the duration of the project as you suggested. The split is only 50/50 if each side is putting up 50% of the money. The percentages have to follow the ratio of the capitalization. When the project is done, each of the two owners take their portion of the net income.
@Brian Eastman is correct that the the IRS' position is even one flip is business income. There is not a solid rule that says one in a year is ok. Does everyone file one flip is a year as UBIT? I doubt it. EVen if your IRA account itself does not recieve the business funds, it is still the responsible taxpayer for the LLC and UBTI applies to IRAs. See IRS Pub 598 for more info. No, it does not matter whether your structure is called a check book IRA.
Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
9y
I am NOT an expert on this and I only do buy and hold rentals with my SDIRA, so I am just regurgitating what I have read here on BP.
IF you were 'just the lender' and not a 'partner' with your SDIRA, it would simplify things as there would be no UBIT tax due and no partnership or LLC structure needed, I *think*.
The down side is you can just 'share the profit' that way. You could have some poiints and a higher interest rate, IF the project could afford that. I *believe* that the rate can NOT be tied to the eventual outcome of the project.
I am sure some others here could give you more/better info.
One other thing to keep in mind is that if your SDIRA is participating in ANY way, even as a lender, that you then can not put any 'sweat equity' into the job.
Investor · Delafield, WI · Member since 2014 · 102 posts · 73 votes
9y
Can anyone comment on SD IRA Custodians? I was looking at one company called Check Book IRA,LLC.... Expensive to set-up $1,500 but cheap annual fees $200.00..I'm still in the exploring mode. Maybe late 2017 get it rolling.
Checkbook IRA is not an IRA Custodian. They are advisors and facilitators who create an IRA-owned LLC entity. This structure is designed to provide you with checkbook control, as the IRA will own the LLC, but you can control the LLC as the non-owner manager.
They use an IRA custodian (not sure who these days), but the custodian is very much in a back end role.
The IRA LLC model is beneficial if you will be engaging in investments that are either time sensitive in nature or require frequent expense/income transactions, as you will be able to directly transact via the LLC and a bank account of your choosing, without having to go through the IRA custodian to process each and every transaction. This is also why the ongoing fees are lower, since you are eliminating all that 3rd party processing.
If your investment goal is something singular and static such as purchasing shares of a private company stock or a single, longer-term note, then the IRA LLC may be more tool than you require.
There are a lot of quality providers of both program types here on BP (as well as some less than stellar providers, unfortunately). Be sure to chat with a few providers and check references. With a little research, you can find the right fit for your investment goals, with a team that will provide good support to you over the long term.
BTW, no one firm acts as custodian and LLC facilitator. Custodians are prohibited by rule from providing tax, legal or investment advice, so an outside firm will be used.
Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes
9y
I THINK the only time you are exposed to UBIT is if your Ira is exposed to some type of debt instrument (i.e. Mortgage). Otherwise you are good to go. Your personal LLC would file as a 50% owner on schedule e, you self directed would have to report valuation of assets. Contact a good CPA, but is how I understand it. Although I have no direct experience in UBIT. AG
Rental Property Investor · Millersville, MD · Member since 2017 · 127 posts · 44 votes
8y
When structuring a partnership LLC, does each partner need to bring fiscal assets to the table?
Can I form a LLC to purchase a multi-family asset, finance funding through a bank (non-recourse), use the SDIRA to fund the down payment (20%) and setup the LLC as 20% SDIRA and 80% me?
You are considered to be a "disqualified person" to your IRA, your proposal won't work, it would be considered prohibited transaction by the IRS and will disqualify your IRA. Read this:
Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
8y
@John Dorsey
Such transaction may be possible provided very specific rules are followed.
You will want to work with an attorney/CPA that specializes in this type of transaction.
At a high level, here's one scenario. An LLC is formed for the first time and you invest your personal funds and IRA funds into the newly created LLC-- one time funding. No debt can be brought to the table at time funding or in future years. What is more, no more contributions (i.e., neither the IRA nor you can invest more funds into the LLC). Again this is just a high level example.
Not that would not be allowed as a financing is note allowed under the TIC transaction where the retirement account holder partners alongside their retirement account in the real estate purchase. Among other things, it has to be an all cash purchase-no debt.
Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
7y
I was doing some googling on this topic and low and behold here I am back at bigger pockets again :-)
I have been reviewing a couple of books I have on investing with retirement funds and still am not clear on something.
Say I have a partner who wants to use their SDIRA or SOLO401 to invest along side of me. Their retirement account will bring the down payment of 10-25% depending on the deal and be 'completely passive'. I will do all the finding, buying, and ongoing PM. We, meaning me and their self directed account,will both sign on the loan with the retirement account NOT having 'recourse' and I may or may not need to sign a personal guarantee depending on the deal.
The thought would be to split everything 50-50, cash flow and equity growth. I am currently doing a regular cash purchase this way. Within the framework of a deal with a self directed account being a partner could it still be structured the same way, since both their retirement account and I are 100% responsible for the loan?
Would love to hear what some of you pros out their think about this!