self directed ira using real estate purchases
I have a client who wnats to take money from his traditional IRA and move it into a self-directed IRA so he can purchase real estate for rental purposes. He also wants to be in control of the checkbook so he can put money down on a bid and if he gets the bid, he has to put money down on that. Can he do this and if so, what problems is he going to run into? It seems to me he will have UBIT issues and also runs into the problem of self dealing. It also seems the custodian will have to do a valuation on the real property at least annually. Has anyone else run into this issue?
Permalink Submitted by Alan Spross on Tue, 2012-01-17 18:02
While these issues do exist for real estate held in self directed IRAs, the major self directed custodians such as Guidant and Pensco are pretty good at avoiding self dealing and providing guidance for the IRA owner. The client should have a detailed discussion with such a custodian before acting, and should NOT consider a custodian who does not have extensive experience with self directed IRAs and IRS issues. As far as removing money from the IRA for a bid and rolling it back in the event the bid is unsuccessful, there is only one such rollover allowed over a 12 month period. If UBIT is generated, the IRA owner should be sure that there is liquidity for the IRA to pay that tax and that the IRA custodian will take care of filing the 990. Here is an article about self directed IRAs and exposure various prohibited transactions and other pitfalls. Note the section on which people are disqualified persons:
http://www.aba.com/NR/rdonlyres/D8BE9599-E5ED-4994-91CB-BF8B23A2AE7C/429…
Permalink Submitted by G. Kowalski on Sat, 2012-01-21 19:30
Alan-Oniras is correct. I have two thoughts to add:
– For the checkbook control, you’ll need to create an LLC within your IRA. This should be created by a qualified attorney who has experience specifically with LLCs in IRAs to ensure it includes all the proper terms and does not exclude anything you need. Talk with them about the ability for capital contributions after you’ve already established the account. If the LLC Operating Agreement does not address this specifically, your custodian may not allow for it. That can cause problems later if you need to purchase a water heater or new roof for the property.
– In addition to the companies Alan-Oniras referenced, I would also add Entrust Group. They provide a lot of educational programs, both local and online, specifically about investing in real estate in your IRA.
http://info.theentrustgroup.com/webinars
Good luck.