The downturn of the stock market has veered the limelight onto real estate investing. After many years of being held in the dark, people are now starting to realize that they can legally, not to mention profitably, invest in real estate using their self-directed Individual Retirement Account (IRA), Roth IRA or Simplified Employee Pension (SEP). Although this investment strategy presents several strong points, it also has it share of pitfalls. These include funding that is not readily available, custodian fees and the risk of your IRA getting sued.
Thank goodness for LLC-IRA! These impediments can be eliminated by setting up a single-member Limited Liability Company or LLC. Your IRA is the single member and owns the LLC. Rather than invest straight from your IRA, you can channel your investment through the LLC. Being a lawful entity, the LLC is entitled to powers and immunities not enjoyed by a typical IRA or any individual.
The team-up between the LLC and the self-directed IRA custodian generates a synergy. Do not think that this newfangled LLC is the same kind with those LLC’s you may have previously established. You will need the services of a competent lawyer to prepare the preliminary version of the operating agreement and come up with an opinion letter to your IRA custodian. Make sure that the operating agreement has been satisfactorily prepared or your LLC IRA may be rendered ineligible and could be taxed.
Lawsuit-Proof Your IRA Account
A one-member LLC is a legal business entity that is separate from your own person or that of your IRA. It can sue or be sued separately from its owner (your IRA) and its manager (you). In other words, you or your IRA account are not personally liable for the obligations of the LLC IRA. For example, suppose a tenant sues your LLC for injury, the tenant cannot legally pursue you or your IRA account.
Funding At Your Fingertips
Since you are the manager of the LLC-IRA, you are authorized to write checks to acquire property, pay for property expenses or loan money. This is especially beneficial when you have time-sensitive deals that need immediate financing, such as in foreclosure auctions. You can just proceed to your bank and have your money wired or certified within the day.
Always remember that transactions which are not allowed in your IRA account are also prohibited in your LLC-IRA. Before undertaking a transaction in your LLC-IRA, make it a point to seek the professional advice of tax and legal experts.
Form Your LLC-IRA In 3 Steps
1. Find out if your custodian permits you to totally control your existing IRA account. If not, transfer it to a custodian that does. Schwab, Fidelity and other large companies usually do not permit IRA holders to use their account to invest in real estate.
2. Seek the services of a professional to form the LLC.
3. Direct the money from your IRA custodian to the bank account of the LLC-IRA so that you can finance the LLC.
4. You can now begin investing in your LLC.
By creating the LLC, you pay lower fees for your custodian since the IRA only has the LLC as its sole asset.
Are We Breaking Any Law?
For several experts, it is legal for an IRA account to own an LLC. Their basis is from the 1996 case Swanson vs. The Commissioner. The court sided with the taxpayer which has an IRA account that owned a corporation, for which he was president. This is similar to the case of the LLC-IRA.
It is best to seek the counsel of a legal expert who can legally direct you through the undertaking and to answer your concerns regarding the legality of your LLC-IRA.
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