Re: Self-Directed IRA & IRA LLC - Posted by Penny
Posted by Penny on June 17, 2007 at 11:01:50:
I’ve been investigating this also.
First and most important, be aware that the IRS is currently scrutinizing the single member IRA LLC set up for this purpose (e.g. the “checkbook IRAs”, et. al.). Should a ruling go the wrong way, then potentially the IRA funds are considered distributed and you pay ordinary taxes on the whole thing plus a 10% penalty. Potentially a truly suck-ee-doo situation!
Because of this, Equity Trust recently told me they are no longer allowing their clients to invest in the single member LLCs in this fashion to protect them against a possible adverse ruling.
That said, to use your IRA funds to invest in real estate, you need a custodian that facilitates this. The primary 3 you will see on a google search are Pensco, Equity Trust and the Entrust Group. I’m sure there are others.
Basically, you direct your custodian to make the transactions. There are fees associated with this that you need to factor in against your return. They vary by custodian, so ask lots of questions.
Even with a good custodian, there are very important IRS rules to follow regarding disqualified persons and prohibited transactions. IRS publication 590 has a lot of info and can be found on the IRS website, www.irs.gov.
Once you’ve made some profit, if you have used leverage, some of those profits will be subject to what is called UBIT taxes. This is Unrelated Business Income Taxes. It is intended to level the playing field between non-profit and for profit entities conducting the same type of business, e.g. if a church owns real estate that it rents out, the real estate business generates income for the church but is unrelated to the church’s primary purpose.
For an IRA, the UBIT tax rates are at trust rates, not corporation rates. Unfortunately, the trust rates are higher than the corporate rates.
So in figuring your real rate of return, you have custodian transaction fees and UBIT taxes to consider into your equation. If your ROI still looks good, then go for it. But I’d still compare the returns against a good old fashioned low fees index fund.
Hope this helps.