Setting Up an IRA LLC

If you’re thinking of using your retirement funds to help fund your real estate investing, it won;t be long before you come across the concept of a self-directed IRA LLC.

Completing a real estate transaction with a self-directed IRA can be a slow and cumbersome process.  Since an IRA is a tax-deferred vehicle, governed by the Internal Revenue Code (the “IRC”), your IRA custodian and you need to use extreme caution to avoid tripping the penalty provisions of the IRC.  These penalties could have tax consequences that can wipe out a good portion of your retirement savings.  For that reason, funding a transaction with a self-directed IRA often turns into a gauntlet of documentation that needs to be cleared well in advance by your IRA custodian and signed by parties to the deal you may not meet until the closing.  Add a time sensitive, foreclosure or REO transaction, that needs to close within days and self-directed IRA investors often find themselves frustrated and unable to get it done.

The concept of an IRA LLC (sometimes referred to as Checkbook IRA’s) appeals to real estate investors by eliminating the time consuming documentation and dealings with the IRA custodian prior to funding the deal.  In other words, accessing the IRA funds becomes as simple as writing a check (i.e. checkbook control).  In real estate, where the best deals go to those who can act quickly, the IRA LLC is often the only way to go.

Setting up an IRA LLC is way more involved and costly than a traditional LLC for a few reasons.  First, the owner of the LLC is your IRA account – not you.  Second, the Operating Agreement needs to be written such that the permissible activities of the LLC will be in compliance with IRC regulations and not be deemed a “prohibited transaction”  (part of what we do, is advise clients on what a prohibited transaction means so that they can avoid them).  Third, your IRA custodian will have a laundry list of requirements, forms and documentation that will need to be completed before funding the new limited liability company.  Seems like a hassle, but usually well worth it because once you’re done, you’ll have a ready source of funds for your real estate deals that can be accessed simple by writing a check.

Sounds like a great way to go, right?  Here’s the downside.  The IRS has not explicitly ruled on the legality of IRA LLC’s.  Proponents of the IRA LLC point to regulations similar to those governing IRA’s as to why they’re legal, but others argue that until there’s an explicit ruling by the IRS, we  simply don’t know for sure.  The use of IRA LLC’s is small enough that it  really hasn’t garnered the attention of the IRS . . . yet.

If you’re willing to assume this risk and want to set up an IRA LLC, you’d be well-served to use an IRA custodian that is comfortable with this structure and get an attorney who knows the prohibited transaction rules and other applicable regulations so that your IRA LLC will be compliant with the IRC.  We have assisted many investors in setting up IRA LLC’s, so if you have any questions, feel free to give us a call at 631.669.6300 and ask to be put on my calendar for a brief ten minute introductory call to see if this structure might be right for you, or feel free to shoot me an email at jclark@clarkslaws.com.

Jim Clark