Self directed IRA investing

8 Replies

@Komi Agbodzie

Well, your question is a bit broad to provide a precise answer. Getting on the phone with an IRA professional will be the best way to learn what will or will not work and the best approach based on your specific situation and goals.

An IRA may invest in a private entity such as a LLC or LLP that holds real estate.

That entity may have no controlling influence by you or lineal family that are considered disqualified persons to the IRA.

There are considerations that may impact whether such an investment will be beneficial to an IRA. The use of debt-financing creates a nominal tax exposure for an IRA through UDFI that is generally not a big deal, but certainly something to factor into your analysis. If the real estate entity is engaging in a trade or business such as new property development for immediate sale, or flipping of properties, that can generate exposure to taxation on UBTI, which can be more detrimental to the ROI. Passive income from rentals and lending is not subject to UBTI.

@Komi Agbodzie

Yes you can buy equity in a RE portfolio. 

No you don't need an LLC to do it in a SDIRA

@Brian Eastman is spot on with his points-get a knowledgeable professional to help you. 

@Komi Agbodzie Good advice so far! I have clients that purchase rental properties through a self-directed IRA, and they LOVE doing that. There are quite a few benefits to doing that, so consult a pro and discuss the details, but I think it would be silly not to!

SDIRA investor here. Great way to invest in property. I invest in syndications with mine, in addition to the syndications I do actively. Generally an LLC buys the property and investors' SDIRAs buy membership units in the LLC.

I like syndications for SDIRA investing because it's much easier to not mix money, and syndication investments are about as passive as it gets in real estate.

I'm considering doing some investing using a SDIRA, but my business manager of over 20 years says he is "not a big fan as I've seen them attacked by the IRS on numerous occasions".  Any thoughts/comments?

@Jason Miller

I would be curious to hear the context of what your associate is mentioning. We have been helping clients to establish self-directed IRA and 401(k) plans for 14 years and have setup thousands of plans for investors all across the country. A very small percentage have been audited, and all of those had no issues with the audit because they were adhering to the IRS rules.

These vehicles are a very effective means to take greater control over your tax sheltered retirement savings and diversify your portfolio into stable and income producing assets such as real property, partnerships, private lending and the like.

You do need to become educated on the IRS rules, which apply equally to a conventional IRA but you just are not given the flexibility to need to deal with them. The rules surround keeping this money separate from personal finances, and avoiding any direct or indirect benefit between a plan and certain disqualified persons (you and lineal family mostly). A professional plan provider can help you understand what works within the IRA framework.

Originally posted by @Komi Agbodzie :

Can I use a self directed IRA to buy equity in a real estate portofolio?

if yes, is it necessary to do this through an LLC within the SDIRA?

Thank you all!

Here are some issues to consider:

1. In order to have checkbook control, the IRA account will need to be at a trust company that will allow the IRA to invest in an LLC (where you will be the manager and your IRA will be a member - an as manager you will have checkbook access to the LLC bank account). Therefore, you will want to confirm that the trust company allows for investing in an LLC and the associated fees and minimum balance that applies to the IRA account.

2. Confirm that the IRA LLC provider will prepare all of the documents needed to not only form the LLC (articles of organization, SS-4 to obtain an EIN) but also the documents needed by the trust company to process the investment of IRA funds in the LLC.

3. Confirm that the provider has experience with the particular investments in which you intend to invest your retirement funds as you very likely will have questions in terms of the mechanics (e.g. how do you invest in real estate, etc.).

4. Confirm that the provider has a pristine reputation (e.g. Better Business Bureau reviews, etc.).

5. In addition, if you are self-employed with no full-time employees you may wish to consider opening a Solo 401k instead of a self-directed IRA as it has several advantages over an IRA LLCsuch as much higher contribution limits, direct checkbook control (i.e. no need to have the account at a specialty trust company), ability to take a 401k loan, exclusion from unrelated debt finance income tax with respect to investment in real estate acquired with non-recourse financing, etc.