Who Owns the LLC in a Self Directed IRA?
An LLC established within an IRA can allow an IRA to invest in alternative assets, like real estate. However, this form of investment carries its own set of rules; specifically there are certain investments the LLC cannot make that are prohibited transactions.
An IRA LLC also allows for checkbook control, giving its owner complete signing authority over all business accounts. This can be particularly helpful when working with multiple investors on real estate deals to expedite them more rapidly.
Many Self-Directed IRA investors use LLCs as an effective way of exercising “checkbook control.” LLCs are ideal structures for investments requiring frequent transactions, with liability risks or that require increased privacy or control, making this form of organization ideal.
An IRA LLC may be used to invest in any alternative investment permitted by the IRS, such as real estate, precious metals or private equity.
Note that an IRA-owned LLC must follow IRS rules regarding prohibited transactions and disqualified individuals, which typically prohibit mixing personal funds into your IRA or acting as its fiduciary.
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Self-directed IRA LLC accounts allow their account owners full “checkbook control” over their retirement fund assets, providing access to investing in alternative assets like real estate.
An LLC is often chosen for SDIRAs due to the limited liability protection it affords its members, or owners. Furthermore, an LLC’s earnings don’t incur entity-level income taxation but instead “flow through” directly to its members via their ratable share of profits.
While IRA LLCs provide great flexibility, it’s crucial that their rules are understood so as to avoid prohibited transactions such as purchasing property owned by disqualified people or breach of fiduciary duty. Furthermore, an IRA LLC must not make investments that violate IRC 4975’s exclusive benefit rule.
Employing an LLC as a structure to invest is increasingly popular among self directed IRA (SDIRA) holders and is commonly known as the “checkbook control” strategy. This method also commonly used when acquiring alternative investments like private equity and real estate.
IRS Field Service Advisory 200128011 confirms the IRS’s permission for an SDIRA to own an LLC for tax purposes, as affirmed in Tax Court case Swanson v. Commissioner and as further confirmed in IRS Field Service Advisory (FSA) 200128011.
LLCs are considered pass-through entities for federal income tax purposes, meaning that profits “flow-through” directly to members and are taxed at their individual rates.
Practitioners generally advise an IRA/LLC not to provide salaries or compensation to its owner or anyone disqualified, in order to comply with IRC Sections 408 and 4975 and avoid violations. As part of its operating agreement, this restriction should also be included.
SDIRA investors often turn to an LLC within their Self-Directed IRA in order to purchase real estate or reduce transaction fees when investing multiple assets. Furthermore, this structure provides asset protection by making it harder for creditors and lawsuits to access personal assets that might otherwise be at stake for a holder of an SDIRA account.
Understand that LLCs provide valuable liability protection, but only when properly established and maintained. If funds from an IRA and an LLC commingle, or the latter violates IRS rules such as prohibited transactions or its operating agreement, an IRA could lose its tax-deferred status and become subject to tax liability.
Usually, an IRA owns all the shares in an LLC while its owner acts as manager with signing authority for contracts and an expense account to cover expenses. Utilizing an IRA LLC may help to reduce property management fees when investing in rental properties.