I'm new to BP and so far love the environment. Had a quick question about business entity formation in California. I'm currently in the very early stages of trying to roll an old 401k into an SDIRA and use the $22k worth of funds to get me involved in my first deal. From what I can gather, LLCs are generally used for such a transaction? But...If I wanted to engage in other REI deals with money straight from my savings account, would I have to form a separate business entity in order to take part? Any recommendations on what entity a California resident looking to do both in-state and out-of-state deals should use (LLC vs C-Corp vs S-Corp)?
An IRA will not get YOU involved in YOUR first deal. Anything falling within that description would be self-dealing and result in severe tax penalties for the IRA.
A self-directed IRA allows the IRA to diversify beyond the stock market into assets such as real estate and private lending, but everything is done through the IRA and exclusively for the benefit of the IRA. You cannot mix IRA and personal funds or otherwise personally benefit from the IRA.
With $22K, I would recommend against a self-directed IRA LLC in California. The setup and maintenance costs will be prohibitive and eat up any potential differential in returns that you may be able to generate in real estate as opposed to other IRA investments. A California LLC will cost at least $1,000 to maintain between the associated IRA fees and the $800 minimum CA franchise tax. It would take a 4.5% ROI just to cover your admin costs and break even.
You could look at simply opening a self-directed IRA with a low fee custodian like IRA Services Trust Co in the Bay Area or Kingdom Trust Co in KY. That account would not provide the same level of checkbook control, but would be well suited for something like a crowd fund or private lending transaction.
Thanks a ton for the information @Brian Eastman . Definitely gave me a few points to research. For individuals who have used a low fee custodian, what kinds of issues have prevented custodians from providing consent to the owner?
Custodians for the most part do not "consent" to allow an investment based on its merits or compliance with the tax code. That is not their job. So long as you provide the necessary documentation for them to correctly record what has happened, they will in most all cases process the transaction. Some custodians do have certain restrictions as to what they will process, but that would require speaking with them directly.
CA is challenging due to the the FTBs expectation that every business entity doing business in CA pay the annual fee of $800.
However that only applies to state formed entities, such as LLCs. Use of a Checkbook 401k (by those that qualify), provides checkbook control and escapes the FTB fee.
Are you planning to perform the work on these properties? Are they rentals? Are they flips?
@Brian Eastman That makes more sense. I had read that some custodians have restrictions on certain investment types so consent is required before execution of an investment could take place.
@Bernard Reisz That is an interesting point. Unfortunately, I don't qualify for a Checkbook 401k.
@George Blower I do not plan on performing any work on the properties myself as that would put me in violation of passive investment criteria for an SDIRA and I would be penalized heavily from a tax standpoint. Based on some of the information I have gathered from Brian, along with some of my own research, I believe a crowdfunded deal or a private lending opportunity may be my best bet with this vehicle.
Okay. In that case then yes you can pool your personal funds and IRA funds in the same LLC for investing in real estate. Specific rules apply under such transaction, however.