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Dear Robert:
The answer to the first part of your question is yes. The use of limited
liability companies in conjunction with a self-directed IRA for real estate
investments, although a relatively unknown strategy in the past, is gaining
in popularity these days. This strategy generally involves forming an LLC
with the self-directed IRA as an owner (or "member") of the LLC. Funds are
transferred to the LLC which, in turn, purchases and holds title to the real
estate.
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The second part of your question is not as easy to answer, thanks to
ambiguities in the tax laws and ever-changing IRS rulings. It is important
to tread carefully when structuring the ownership of your LLC to ensure that
your investments do not constitute "prohibited transactions" as defined by
the Internal Revenue Code. Prohibited transactions can jeopardize the
tax-deferred status of an IRA. The IRS defines a prohibited transaction as
"... any improper use of your IRA account or annuity by you, your
beneficiary or any disqualified person." Disqualified persons include you
(the IRA account owner), your fiduciary and members of your family.
Differing opinions exist within the legal community as to the percentage
of ownership interests an IRA account owner can safely have in an LLC. Some
have suggested that 100% of the LLC be owned by the IRA; others caution
against it.
Some financial advisors recommend a conservative approach to structuring
an LLC, with less than 50% of the interests to be owned by the self-directed
IRA and the appointment of a managing member who is completely unrelated to
the IRA account holder to handle the real estate transactions and property
management on behalf of the LLC.
I would strongly urge you to play it safe and consult a qualified tax
professional such as a CPA or tax attorney to help you decide on the
appropriate structure of ownership for your LLC.
Chrissie Mould
About the PowerHomeBiz.com Guide:
 Chrissie
Mould has over a decade of experience in business administration and
startup business consulting. She has helped launch companies in multiple
industries and has managed corporate administration and governance for
public and private companies. She is an incorporation specialist with
MyNewVenture.com LLC. The company provides low-cost incorporation services
to entrepreneurs and small businesses. Visit
www.MyNewVenture.com to form
a corporation or LLC.
The opinions expressed in this column are those of the
author, not of PowerHomeBiz.com. Users should not treat the Guide's response as
legal, accounting, or professional advice as all answers are intended to be
general in nature. Such advice can only be properly given by qualified
professionals who are fully aware of a user's specific geographical areas or
circumstances, such as an attorney or accountant.
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