All Forum Posts by: Account Closed

Your 100% answer should come from the accountant / CPA who helps you file your CA State taxes. I hear that CA is different from perhaps every other State on this issue. My understanding is that only the net portion attributable to you as the owner of the LLC is taxable to you in CA. The business income is taxable in SC.

@Nicole B., the general rule is that all assets of the entity in bankruptcy are up for grabs. The "limited liability" of the LLC (which is what LL stand for) means that the liability of the company is not extended to its owners beyond their equity in the company (except for fraud, etc). Generally, in this scenario, your other properties will not be affected. However, bankruptcy trustees have wide latitude. So, for a 100% answer to your question, you need to discuss this with your bankruptcy attorney.

@Doug Rich, I agree with @Brian Eastman's answer. I also want to add some clarification. My specialty is keeping people legally in bounds and words can make a difference. I see your two points as different. Your first concept address prohibited transactions (PTs). No disqualified persons (DPs, which is a bigger list that just you) may transaction with your qualified assets. There are some exceptions, for example your IRA owns stock in Microsoft and you are a Microsoft employee is ok, but in the realm of self-directed IRAs the best rule of thumb is that there are no exceptions for you. Just don't create PTs. The list of PTs is a lot longer than "working on".  

Your second point is "hire a custodian and they can finance a purchase of a rehab." Not exactly. Your IRA must have a custodian. Some IRA custodians allow IRAs to own real estate, most do not. This is not because of whether the IRA rules allow it - they do - it is a custodian preference. If you place an IRA with a custodian that allows your IRA account to own real estate, then your IRA may own the real estate. This has nothing to do with your first point. You, and all other disqualified persons, are still not allowed to work on it. Neither is the custodian as the custodian is also a DP.

The IRA rules only disallow life insurance contracts and collectibles. All other investments are allowed. Custodians are allowed to restrict investments to something they control (such as gold, mutual funds, etc). Most custodians restrict the available investments. The IRA rules also restrict transactions (PTs) between IRA assets and DPs. The custodians do not modify these rules. No matter which custodian you pick, PTs are PTs.

Then there are companies like mine, who help educate people and place them in a self-directed account that is going to work best for them. We are not custodians. We charge fees. The IRS sometimes refers to us as promoters. 

I hope this helps. If something is less clear, please feel free to ask. 

@Todd Magin, as to your point number 2, there are no prohibited transactions as long as the people are not disqualified persons (DP) in relation to each other. The list of who is a DP is broader than just one's self. See this IRS list.  

@Todd Magin, Perhaps I can take a bit of the sting out of your point 1. To keep the math easy, an IRA has $100k to invest (leaving a necessary amount for expenses). You find one property for $100k. You can rent it out for $1,200 / month, net ~ 12% for the year. Instead, you find two houses at $100k and buy both using a 50% loan to value non-recourse loan on each. Rent them both out. Doubled your net income and return on investment. However, 1/2 of the funds were not your IRAs money. In this example, your IRA pays unrelated debt finance income tax (UDFI, a subset of UBTI) on 50% of the income, AND is allowed to deduct a ratio of the expenses. If you run the numbers, even after paying an income tax on the portion of income generated using non-qualified money, you are still ahead of the initial 12% total ROI. Making more money using someone else's money. Not a bad deal. Those funds do not become qualified funds just because they are loaned to an IRA, so they do not get the tax deferred treatment. Does this help?

@Nathan Christensen, the 100% answer is to lengthy for a discussion here. Best to find a good CPA. Corporations, partnerships and persons are taxed differently. Deductions differ. (expenses deducted against gross income to get to the taxable net). Generally, the nature of income as active or passive does not change depending on how you own it but how you create it. If you want a general education on how corporations are taxed, the "For Dummies" series has a couple of good books. 

@Account Closed, while only sic States require operating agreements, I believe any LLC with more than one owner should create an operating agreement. Even single member LLCs should have operating agreements if you want bullet proof liability protection. The reason your CPA is suggesting an agreement is that the IRS' default on income is to split evenly. If you want something different, they want you to have it in writing and remain consistent.

@Pauline Misiak, Yes, you may use your LLC to reinvest in REITS, but I agree with @Scott Vance that I don't know why you would want to rather than in your own name. REITS are not the type of investment one typically desires to segregate for liability reasons. REITS can be a good investment, are a way to invest in real estate as you suggest, "with no debt and having little money available." Just not sure why to involve an LLC. 

I believe this depends on why you think you need more protection. For example, some people try to transfer assets ahead of a known legal issue. The court can find ways to loop the asset back in under fraudulent transfer rules. 

Success with an SDIRA is a combination of knowing your investments and the relationship with your IRA custodian. I can walk you through some pros and cons, but essentially with the right kind of SDIRA you can make as much as you want investing in what you know. Some people do not want to create taxable (business) income inside their IRA as IRAs have to pay income tax on UBTI. Other clients see it as a cost of an otherwise awesome net return. You want to steer away from any prohibited transactions.