SD-IRA, to use LLC or no?

Question

I have done research already, but hoping for a quick primer on:
I want to move some of my IRA into Self-Directed and use it for rental properties. I will purchase 1 or 2 homes using non-recourse loans, and I'm shopping turnkey investments-- I'm not doing flips, rehab, wholesale, or other arrangements.

My question: what are the differences and Pro V Con for using an LLC within my SDIRA vs Not using LLC?

(I do not have an LLC now, I am the only person involved, I live in Calif and LLC registry fees are expensive here. So leaning away from using an LLC. )

Thank you!

Brian Eastman · Answer

@Andrew R.

With two properties using mortgages, there will be a lot of transaction activity on the account. The LLC, or other forms of checkbook control such as a Solo 401k or IRA Trust would dramatically reduce both per-transaction fees and more importantly all of the bureaucratic paperwork and delay that goes with a 3rd party custodian/transaction processor.  It is worth exploring by speaking with some professionals in the field.

Need to run to an appointment, so sorry for the very brief post.  I simply wanted to encourage you to really research the options, as there is likely a beneficial path you can pursue that provides checkbook control.

Account Closed · Answer

I've had some clients work with Equity Trust and have no problems..

Dan Mahoney · Answer

@Andrew R. Owning a rental without a checkbook is going to be a huge pain in the neck. In addition to the mortgage, you'll need to pay taxes, insurance, property management, repairs, etc. Lots of bills.  You are going to get pretty tired of requesting each payment from the custodian, especially given the level of customer service at most SDIRA custodians.

Will your rental properties be in California?  If not, you may be able to avoid the CA franchise tax problem if you form an LLC in the state where the properties are located.  (Of course, consult your tax advisor based on your specific situation).

One last thought.  As a general rule, holding rental properties in an IRA is sub-optimal, for three reasons.  First, you'll miss out on all the tax advantages you get from holding rental property in a taxable account (depreciation, 1031, etc.).  Second, it's way harder to use leverage since recourse financing is not allowed.  Third, if you do use leverage, you may generate taxable UDFI.  By contrast, IRAs are great for sheltering interest income and short-term capital gains.  I'd suggest you look at your overall asset allocation and see if it makes more sense to buy the rentals in your own name and put something else in the IRA.

Justin Windham · Answer

@Andrew R.

I have a strong preference for checkbook control, but I realize that comes at a cost for you (needing a special purpose LLC and having to pay annual fees to California since you are not Solo 401k eligible). One of the things you might want to do is look at the fee schedules of various SD IRA custodians and compare the difference in custodial fees with and without checkbook control. You'll likely save money with most fee schedules with the LLC vs asset based and transaction based fees you'll likely pay without checkbook control. The savings should offset some of the cost of the LLC and you can make a decision based on the real net cost of having that increased control and flexibility. If you were ever considering self-employment (this can be on a part time basis and in addition to being employed), the Solo 401k could be icing on the cake.

Steven Gesis · Answer

Andrew-

You will need to make the transfer to a qualified custodian, sounds like you already know you will  a non-recourse loan, these loans are more money down and harder to find, but they exist, they also are typically a little more expensive. Now since we are past the technical stuff, the easy stuff is finding the TK provider that matches with your goals and criteria for investing. As you are n out of state buyer I encourage to check out:

A Simple Guide for Buying Out of State Turnkey Investment Property

Sorry forgot to answer, you may not want an LLC for your SDIRA due to lending provision that may prohibit your ability to get financing.

Not sure you will need an LLC, but you may want to check in with your accounting professional to make sure it aligns with any of your other financial business.

Mark Nolan · Answer

@Andrew R.

I would stay away from Equity Trust as a lot of their clients transfer to an IRA LLC because they such a nightmare to work with. I used to have a self-directed IRA with them so I'm speaking from experience. IRA Services Trust Company out of San Carlos is much better for seal-directed IRAs speaking form first hand experience.

Brian Eastman · Answer

@Andrew R.

Asset protection and access to advisement that a custodian cannot provide.  Also the ability to reinvest idle/contingency capital much more easily.

Andrew R. · Answer

Thanks already everyone, my money is currently in an IRA; I do not have a 401k and I'm not self-employed, so Solo401k is not a good fit for me.

EquityTrust appears to offer SDIRA with no transaction fees.  Other than transaction fees and checkbook control, are there other + or - to the "LLC or Not" debate, specifically for SDIRA?

Thomas S. · Answer

Operating with a LLC is more expensive on a ongoing bases and places many restrictions on borrowing money. Having adequate insurance is as much if not more protection than you need starting out.

A LLC is more of a psychological protector than anything else. It however does not always protect the individuals from being sued.

SD-IRA, to use LLC or no?

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