How to Use LLC to Invest Funds From a Self Directed IRA

February 9, 2005 | By | Reply More

QUESTION ON Self Directed IRAs

Can I use an LLC to invest funds from a self directed IRA in real estate? If yes, how would I structure the LLC. If no, what structure can I use and how would it be structured?

– Robert Panzera, New York


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.

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

Robert’s Response:

Thank you for responding to my questions. Your response was very helpful. What you said makes very good sense. The problem I am having is finding a CPA or a Tax Attorney that is knowledgeable in this topic, but I will still look. Thanks again, Bob

Robert Panzera
NET-COMM Associates, Inc.

Recommended Resources on How to Form LLC:

Chrissie Mould

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 LLC. The company provides low-cost incorporation services to entrepreneurs and small businesses.

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Category: Business Structure, Q & A

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