IRA LLC

[Brent Mattison]

Looking into IRA LLC and had a question about the cash flow from a property. Does that go back into the IRA? How about setting up a management company to manage the properties, and do the maintenance. Would this be prohibited.

[Doreen Chaisson]

The asset of your IRA will actually be the single member LLC, not the piece of property. Because a single member LLC has it's own bank account and gives you what many call "checkbook control", income generated from the property that the LLC owns flows back to the LLC's bank account (not to the IRA), and expenses are paid out of it. Your custodian will ask for an annual valuation of the LLC, in the form of a K-1 or other statement of value, which will need to be prepared by the Special Advisor (more on this later) or an accountant. This determines the value of your IRA asset. Obviously, the LLC can return "dividends" to the IRA if it wishes, and when the property is sold and the LLC dissolved, all funds must go back to the IRA. The LLC is free to sell a property, keep the funds, and purchase additional property. All funds in the LLC's bank account must be used either to support & maintain its asset (the piece of property) or flow back to the IRA. It cannot be used to pay salaries to the IRA owners or any disqualified parties, be taken as distributions to the IRA owner, etc. All of that money is technically IRA money and can't be used by the IRA owner or any disqualified parties.

A couple of things to keep in mind with an IRA-owned LLC. First, if you plan to have your IRA invest in an LLC, the LLC has to be a newly structured entity that you fund with IRA and perhaps also personal funds simultaneously. If you set up and fund the LLC with personal funds ahead of time, your IRA will not be allowed to invest, as it is a prohibited transaction to buy from/sell to your IRA.

Furthermore, if your IRA alone, or with a combination of personal funds, owns an LLC, it is considered a "single member LLC" as you and your IRA are the only investors and you are a disqualified party to your IRA. It is do-able, but some custodians may not accept this investment structure due to increased regulatory scrutiny of these entities since 2009. Those that do will most likely require that you appoint a special advisor (licensed CPA or Attorney) to review and sign-off on any LLC transactions to make sure the LLC isn't running afoul of any self-dealing rules (eg - using LLC funds to pay for your own mortgage or daughter's braces).

If your IRA is the only investor in the LLC, the IRA can send additional cash infusions to the LLC. If you co-invest personal funds with IRA funds, adding additional cash to the LLC, either from the IRA or yourself personally, is prohibited. This is a "one and done" type investment, so it's important to plan carefully and ensure the LLC has enough capital at the outset for the purchase of the property, any unexpected repairs or expenses, or to cover gaps when there may be no income generated by the property.

Finally, if you and your IRA co-invest in an LLC, the LLC cannot get a mortgage on the property because the IRS does not allow you to use an IRA asset to secure a personal debt.

If the IRA purchases the property directly or is the sole investor in the LLC, then the IRA or IRA-owned LLC may be able to get a Non-Recourse Loan on the property. There are some lenders who do this. They are generally 3 - 5 year ARMs, and they require a higher down payment and cash reserve. There are some property types, like raw land and mobile homes, that these lenders will not finance.