All Forum Posts by: Doreen Chaisson

I would be surprised if Equity would release your IRA funds to a checking account that you control. The main reason for the custodian cutting checks is to ensure there are no prohibited transactions going on. If you have oversight and check-writing ability for this WF checking account, there is no one "tracking" how the funds are being used. Normally for a real estate purchase, a custodian would release the only funds needed to complete the transaction and not send extra above and beyond the purchase amount.

From my view, with years of experience working for a regulated SD IRA custodian, I think you are putting your Roth in considerable jeopardy. Are you sure your accountant is willing to back up his advice to the IRS if you are audited? Is the checking account set up with your Tax ID# or the Tax ID # of your IRA?

Our clients avoid the hassle of the situation you describe above by creating a Single Member LLC, which they then fund with their IRA funds. The LLC has its own bank account, funded by the IRA funds. The LLC then purchases the property, collects rents, pays taxes and contracts and pays for repairs. Most custodians who accept Single Member LLCs as IRA investments will require that you appoint some kind of "special advisor" - a licensed CPA or attorney - who will provide the required oversight and review of all of the LLC's transactions to be sure no prohibited transactions are occurring.

Another solution is to designate a property manager (should be a non-disqualified party to keep things at arm's length). Your custodian would then release funds directly to the property manager to have on deposit in their account. They can then pay the contractors, as well as purchase those small incidentals like light bulbs (which the property, not you, should be installing).

In the above referenced tax case, the IRA owners were taking same-value rollovers from one account to meet the 60-day requirement of another account; in essence, "daisy-chaining" to refill one account with funds from another account, over and over again, thus perpetually having the IRA funds available for personal use. They were gaming the system.

Keep in mind this does NOT affect trustee-to-trustee transfers, so you can continue to move IRA funds between custodians as often as you wish, as long as you do it via trustee-to-trustee transfer and not via 60-day rollover. If you don't take constructive receipt of the funds, you will be OK.

It is true that the IRS has issued guidance regarding a recent Tax Court decision (Bobrow v. Commissioner) pertaining to IRA rollovers and the 12 month rule. In IRS Announcement 2014-15 the IRS indicates that it intends to issue a Proposed Regulation that provides for only one rollover from an IRA in a 12 month period (upholding the recent decision by the Tax Court). They have, however, indicated that the regulation will not be effective before January 1, 2015.

According to the IRS, they will not apply the Bobrow interpretation of § 408(d)(3)(B) to any rollover that involves an IRA distribution occurring before January 1, 2015.

Any income derived from IRA-owned property will flow back to the IRA. You will only pay tax on this money when you take it as a distribution in retirement (much as you would a return on investment from a stock purchase in your IRA) and it will be taxed at your then-tax rate in retirement (which would theoretically be lower than your current tax bracket).

If you invest the money outside of your IRA, with personal funds including funds you've taken as an early distribution, you will also pay tax on income generated by that investment as well, possibly at capital gains rates. You should consult with an accountant - is it worth the tax and penalty you will pay now to take an early distribution, plus the capital gains on any sales of properties and income tax on any rental-income earnings that you will pay when investing personal funds?

Perhaps you should converting your IRA to a Roth IRA if future taxation is a concern to you. You'd pay the tax now on the converted amount (but no early distribution penalty), and all the income generated by any properties held by your Roth IRA would be tax-free at distribution.

There are many Self-Directed IRA custodians out there. It is advisable to do your due diligence and ask about such things as how long have they been in business, are alternative assets their sole focus, are they BBB accredited and rated, are they a regulated financial institution, have they ever been sanctioned by any regulatory bodies, how many accounts and how much in assets do they administer?

What often gets overlooked is the type of company you are choosing. IRA providers can be put into three separate categories: Custodians, Administrators, and Facilitators.

Custodians are the first type of company, and are usually the most common. They’re either a bank, credit union, or non-bank custodian approved by the IRS (usually a broker dealer who obtains IRA approval). Custodians are permitted to custody assets held in an IRA under IRC Section 408. They’re also subject to strict regulatory oversight at a State or Federal level. Custodians tend to take a more conservative approach when reviewing alternative assets for investment, as they want to avoid the custody of any assets that may be involved in prohibited transactions. Alternative Asset custodians cannot give any tax, legal or investment advice, cannot assist with the structure of an investment, and cannot endorse, promote or align with specific investment sponsors.

Administrators are the next type of company. Essentially anyone can be an administrator, and their main function is to perform administrative functions only. Because of this, they also need to have an identified custodian for the self-directed IRA named in the account disclosure documents. Administrators are only subject to regulation if required due to profession (CPA or attorney), not for role as administrator. This allows administrators to be much more liberal in accepting assets and allows the ability to align with investment sponsors. Review fee schedules carefully – there may be separate charges for whatever 3rd party custodian they are using.

The third company type is a Facilitator. They educate investors on the process of self-directed investing or assist in setting up single-member LLCs for either “check-book control” or to purchase a franchise or ROBS (Roll-Over Business Startup). They may also provide administrative services for the LLC. Like Administrators, Facilitators must have an identified custodian for the self-directed IRA and are only subject to oversight on a professional level. They are also much more liberal in accepting assets and can align with investment sponsors. Again, review fee schedules carefully – there may be separate charges for whatever 3rd party custodian and/or administrator they are using.

So when you’re looking for someone who offers a self-directed IRA, make sure you know the type of company you’re dealing with and what their reputation and regulatory history is. This will help when determining which company best fits your investment scenario.

Esther, please keep in mind that if you plan to leverage your Roth IRA, you'll need a non-recourse loan to do so. Typically non-recourse lenders require 30 - 50% down, as well as a cash reserve. They also will not lend on certain types of property, including raw land and mobile homes. Finally, leveraging your IRA to purchase RE is going to kick off a tax called UBIT. Roughly, it's tied to the percentage of income generated by the % leveraged. Example, if your IRA finances 40% of the real estate purchase, then roughly 40% of the net income generated by that property will be subject to UBIT, which is taxed at trust tax rates. You should consult with an accountant to determine what impact this may have on your return on investment.

It's prohibited because you are doing it for disqualified parties' IRAs. If a random stranger/friend had an IRA that wished to invest in tax liens, your company could provide all the services you describe above, and even charge them a 'facilitator fee'.

It's because it's your personal LLC having a transaction with the IRAs of disqualified parties (your own & family member's IRAs) that it becomes prohibited.

It would be the same scenario if your personally-owned LLC was a painting company. It would be prohibited for your or any disqualified parties to hire your painting company to paint their IRA-owned properties - even for free.

James- To avoid any possible perception of self-dealing (using IRA funds for personal gain), it's always recommended that the non-IRA owner members are the managing members of any LLCs which include IRA investors- especially if they are disqualified to each other or any other members of the LLC.

When family members comprise most, if not all, members of an LLC, the temptation to use LLC funds for personal use can be great. The IRS and Department of Labor found many IRA-owned single member and family controlled LLCs rife with abuse, and cracked down them IRAs a few years ago. They found many were taking the IRA-invested funds and writing checks to pay for their own mortgages, kid's braces, etc. This is why many custodians require that single member and family controlled LLCs appoint an outside 3rd party Special Advisor - generally a licensed CPA or Attorney - to review all transactions of the LLC. Some custodians have stopped accepting single member LLCs as IRA investments all together.

The frequency of profit distributions should be spelled out in the LLC's operating agreement, I would consult with an attorney relative to any requirements that may be in place.

It should also be noted that there are special provisions in place when a multi-member LLC with IRA investors attempts to secure financing for purchases. It is only the non-IRA investors who can secure and sign for the loan, as it is a prohibited transaction for an IRA owner to guarantee a loan collateralized by an IRA asset.

I would recommend you find an attorney who is knowledgeable about the rules and regulations of SD IRA investing to assist you with the structure and function of this LLC. You don't want to get too far down the path and find out what you were planning to do with this entity is prohibited. A qualified SD IRA custodian can also walk you through the do's and don'ts.

@Ned Carey is correct - it is a prohibited transaction for your personally owned LLC to have any transactions with IRAs owned by disqualified parties - your parents, grandparents, spouse, children, grandchildren, spouses of descendants, among others. Technically, your LLC is "winning the bid" and this is certainly documented somewhere, as would be the transfer/assignment to the IRAs. There cannot be a purchase, sale or exchange of assets between disqualified parties when IRAs are involved. Internal Revenue Code 4975 spells out IRA disqualified parties and prohibited transactions, and the hefty penalties for engaging in them. Whether or not the IRS finds out, any reputable custodian will most likely not even accept these transactions to start with as they are clearly prohibited.

Your family members could simply purchase tax liens with their IRA funds, either using their IRA funds directly (if their custodian will agree to release funds to a third party escrow agent for the purposes of an auction) or via an IRA-owned LLC, which would give them "checkbook control". Any liens they purchase would then be reassigned to the name of their IRA (or IRA-owned LLC) by the county as the lienholder. There's really no need for a middle man. I work for a large SD IRA/Solo(k) custodian and we have clients who do this all the time.

I work for a custodian of Self-Directed IRAs. As long as the LLC is newly-formed, and you, your dad, your uncle, and your friend fund the LLC simultaneously, it would not be a prohibited transaction for all four of you to be co-owners of this LLC. It would be advised that a non-disqualified party (your uncle or your friend) be the managing member of the LLC to avoid any prohibited transactions. LLC purchases property, pays for repairs, and sells. None of the LLC owners/investors can do any of the reno work on the property - it must all be handled by outside vendors. Any return on investment would flow back to the investors based on percentage of ownership of the LLC.

A couple of things to keep in mind: Once initial funding of this LLC happens, there can be no capital calls or additional infusion of capital into the LLC by any members. Also, the Dad would not be able to buy out the son's ownership shares and vice versa. Finally, if the LLC is in the business of buying/flipping houses, then it would be considered a Real Estate Operating Company (REOC) and the IRA investors would be subject to UBIT tax on the net earnings of the LLC. UBIT must be paid with IRA funds - not with personal funds or with LLC funds.