This is the big disadvantage of this type of account, IMHO.
A checkbook IRA LLC gives you the control you want, though with more risk. I had a loan to a rehabber go bad a couple of years ago, took back the house, fixed it and sold it. I can't imagine how difficult this would have been without the Checkbook IRA.
Even if you have your IRA get a credit card from Home Depot, will Equity Trust write them a check for a payment? I'm doubtful. Its just to easy for you to have spent the money on something else. OTOH, if the IRA doesn't pay, the money you spend is a contribution, and that has tax consequences.
Your IRA has zero chance of getting a Home Depot credit card, though. HD will want your social security number, which you CANNOT give. You cannot give any sort of personal guarantee for anything your IRA does.
Have your contractor buy supplies and include them in his billings.
Is this a fix and flip? If so, are you familiar with UBIT?
Hi Leslie E. I did mine through Guidant Financial. I think the lawyer was out in the pacific NW somewhere. He's actually independent of Guidant, they referred me to him and his fees are included in the set up. I know he's still around. I actually spoke with him fairly recently.
I also use Equity Trust as a custodian...and as they explained it UBIT was only in the case that the IRA borrowed money towards a deal, not when it was a buy and hold nor as a fix and flip as long as all gains went back to the IRA. I also just had my taxes completed and my accountant he did not mention anything about UBIT on the 2 deals I did in my IRA last year.
Please clarify why the IRA would be subject to UBIT? Is it subject to UBIT when it sells a stock for a 20% gain? If not why would a gain on RE be taxable if all proceeds go back to IRA??
The UBIT for flipping comes from the same tax code as for non-profit companies. If you are performing as a business and not as a non-profit, then you are putting your competitors at a big disadvantage since they have to pay taxes and you don't. When you are flipping in an IRA, you are putting your fellow flippers in a disadvantage.
A good example, let's say a non-profit University started selling hot dogs on campus. They must pay UBIT taxes on their hot dog profits. Otherwise they could sell them for half of what the vendor down the road sells them for.
The purpose of your IRA is to invest for your retirement, and any business it does that is not directly related to that investing is taxed.
Thank you for the help. I just talked with someone from Guidant Financial. They cost a bit more than a couple others I have either talked with or heard about ($1000-1500 to set up the LLC vs about $3000 for Guidant) but it looks like they offer a more comprehensive service. Might be a bit more bullet-proof. :-) Their annual custodial fees are the lowest I've seen so far @ $105/yr so in time I suppose the extra set up cost will be off-set. I'll be talking with someone on Monday to get more info.
We're looking for a local CPA and lawyer (preferably one who is in the know about IRA/LLC's and doesn't have to be educated). Can you offer any recommendations here in the Denver/Front Range area?
Not giving tax advise here but I think that if you (through your IRA)
1) start flipping, the IRS may consider this a business that is outside of the tax protection of a passive IRA--so they may want to tax you for it
2) Use leverage/debt, the IRS considers the income achieved through leveraging to be subject to taxes and not protected by the IRA.
Please chat with a tax person though
In some cases when flipping inside of an IRA it can be considered subject to UBIT. If the onyl investment you made was flipping property it would be subject to UBIT. Whereas if it were only half or a third it may or may not be subject depending upon how many transactions are going on.
Leverage is a great tool in an IRA provided it is used correctly. Income from the financed portion of income is subject to UDFI: Unrelated Debt Financed Income tax.