Can an IRA Be Owned by an LLC?
Self-directed retirement account owners who invest in real estate and startups often opt for an LLC as the investment vehicle, which provides diversification while giving the account owner checkbook control over his or her portfolio.
An IRA owned LLC structure is ideal for real estate that requires direct management. To use this arrangement, an IRA must own 100% of the LLC with their manager serving as its Manager.
Limited Liability Protection
Laws, cases and regulations support the concept that your Self-Directed IRA can own an LLC (commonly referred to as an “IRA/LLC with Checkbook Control”). For this structure to work effectively, however, it must be properly set up. Usually this involves creating an operating agreement which may be required by both your custodian and bank before opening a checking account for your IRA LLC so you can invest real-time.
An LLC provides several advantages, chief among them limited liability for its owners and protecting personal assets from claims made against businesses or investments like slip-and-fall incidents on property. Furthermore, LLCs are taxed as pass-through entities meaning profits reported directly to members’ individual federal income tax returns rather than corporate ones, making filing taxes much simpler. Unfortunately there are some prohibited transactions an IRA cannot engage in when using this structure.
Tax-Free Gains
An LLC allows your SDIRA to invest in alternative assets like real estate and private equity with greater control, providing checkbook control over investment decisions while potentially reducing asset maintenance fees associated with multiple properties.
In general, using an LLC does not alter the tax treatment of an IRA investment, which generally provides deferred or tax-free returns depending on its type. If your SDIRA uses partnership-style LLC investments that generate unrelated business taxable income (UBTI or UDFI), however, you may need to file an information return on IRS Form 5498 or prepare K-1 forms for each owner of that LLC.
Most states impose an additional state income tax on LLCs; however, those operating a Self-Directed IRA LLC with only one owner will typically not need to pay this additional tax; profits of the LLC will flow through directly to them and be reported as personal taxes returns.
Real-Time Transactions
There are a few rules and regulations you must abide by when using an LLC as a self-directed IRA, with the most essential being that the IRA owner may only own 100% ownership in the LLC and act as manager for this entity. This proposition was upheld in Swanson v. Commissioner 106 T.C 76 (1996; IRS Field Service Advisory FSA 200128011 (April 6, 2001).
Draft an Operating Agreement to govern your LLC. Most IRA custodians require this document before transferring funds, while banks often demand it when opening up an LLC bank account. Finally, when buying property through an IRA LLC all rent checks should be made payable directly to it and sent directly back to your custodian – saving significant fees by eliminating property management companies or third party vendors altogether.
Investing in Alternative Assets
An Individual Retirement Account (IRA) allows investors to invest in alternative assets such as real estate, private equity and start-up companies through LLC-structured investments; when this occurs the gains and income flow through tax free.
An IRA LLC can make the process of investing in non-traditional investments much simpler, including real estate purchases or non-bank investments such as annuities. By bypassing the custodian’s review process and purchasing directly instead, saving both time and money.
To set up an IRA LLC, first register it with your state and obtain its federal Employer Identification Number (EIN). Next, open a bank account at a local bank for the LLC so you can use its checking account to make IRS-approved investments and cover expenses associated with properties or ventures owned by it – providing greater “checkbook control” over assets than would be available through Self-Directed IRAs alone.
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