Setting up a SDIRA Real Estate LLC?

Question

I just sold most of my stock in one of my SDIRA accounts and purchased 2 condos that I plan to rent out. One condo is currently vacant and the other is occupied. I have an LLC set up for my other privately held properties, but I haven’t set up an LLC for my IRA held properties.

What are the advantages/disadvantages of setting up an IRA custodian LLC and transferring the IRA properties over? And how the heck do you set it all up (the IRA LLC)??? Quit claims?

Lastly, what are the best insurance policies for covering IRA owned properties? General commercial or a landlord policy (I’ve read that landlord policies don’t properly cover IRA properties)

Thanks in advance for the advice!

Brian Eastman · Answer

@Russ Bramlett

The advantages of having an IRA-owned LLC, otherwise referred to as a Checkbook IRA LLC are many.

The main benefit is efficiency of time and expense.  When you have property held directly in SDIRA account, you must have the custodian process all transactions, including the signing of documents, payment of expenses and receipt of income.  All of this takes submitting instructions, a few days for processing and per-transaction fees.

When you push the IRA to the back end and then have it make a single investment into the LLC entity, you move the control to yourself.  You can then use the LLC directly to purchase property, pay for expenses and receive income without 3rd party interaction.  With two rental properties, this will save you a lot of time and expense.

The LLC also affords a layer of asset protection to the IRA and ultimately to yourself that would not be in place with property directly held by an IRA.

Not all custodians will support the LLC model.  Some don't like that it erodes their fee revenue.  Whether your current custodian will or not is a question to determine.  Either way, the program can be established and the existing properties can be transferred into the LLC - even if this requires switching custodians.

If the LLC is holding property, you definitely want a commercial landlord policy for the LLC.  What you do not want is a policy in your name where the IRA (or IRA LLC) is an additional insured.  The IRA/entity should be the insured party directly.

Costin I. · Answer

@Russ Bramlett What are you trying to achieve by having the properties in an LLC?

If you are looking for checkbook control, you might be better served by a Solo 401K - see also if you/your wife can get self-income and qualify to establish a S401K (like from getting property management fees from the other rental properties you have). Solo 401K is a much better IRA than a custodian SDIRA even with a Checkbook IRA LLC - look into it and talk with @Dmitriy Fomichenko.

If you are looking for asset protection, you IRA itself is a form of protected entity/account from external attacks. If you want to set it up such way a property can't endanger the others or the whole IRA, then putting them all in same LLC might not give you that, as they will all still be in the same basket - you might want to look into Series-LLC - talk with @Scott Smith.

And there is a specific flow on setting an IRA LLC - it has to be a new entity formed specially for the IRA, you can't transfer ownership of an existent LLC to an IRA - and you have to be careful on how to transfer assets from the IRA to the IRA LLC - talk with @Bernard Reisz.

Bernard Reisz · Answer

@Russ Bramlett @Tara O'Hanley

Checkbook control, whether through a Solo 401k or SDIRA, offers the greatest flexibility and control - and, usually, the lowest cost. They are best utilized by those that will have multiple transactions within a retirement account.

An LLC, whether inside an IRA or 401k, offers enhanced asset protection from both "inside" and "outside" liability. Segregation of liabilities should be considered within an IRA in much the same way as it would be considered outside of an IRA. Of course, the nature of the liability exposure will depend on your specific profile.

Assets can be transferred, retitled, between IRAs and IRA-LLCs. Beware of "transfer taxes."

@Costin I. Thanks for the tag!

Justin Windham · Answer

@Tara O'Hanley

If you're self-employed, the additional benefits offered by the Solo 401k may be enough to entice you into obtaining checkbook control. Unlike with an IRA, you don't need the additional expense and administration of an LLC to have checkbook control. That said, the Solo 401k is flexible enough to allow for one or more LLCs to be added to your investment structure, if desired.

Other benefits include:

• Compared to an IRA, Solo 401k contributions limits are roughly ten times higher.
• There is no custodial requirement for the 401k.
• There is a built in-Roth component whereas IRAs are either traditional or Roth, not both.
• A spouse can also participate in the same Solo 401k plan.
• The Solo 401k has additional tax benefits over an IRA when investing into real estate using leverage, specifically an exemption from UDFI tax.

George Blower · Answer

@Russ Bramlett

You have come to the right site to connect with like-minded folk. Welcome to Bigger Pockets.

Setting up a SDIRA Real Estate LLC?

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