How to Create a Real Estate Investment LLC From an IRA
Most people think of investing in individual retirement accounts with stocks, bonds, mutual funds, annuities and certificates of deposit. It is perfectly legal to hold real estate investments in IRAs as well, but there some very specific rules and regulations that must be followed. Investing in real estate with IRA dollars is typically accomplished via an IRA LLC. An IRA LLC is a limited liability company that is owned by an IRA. These LLCs are funded with IRA dollars and operate as any other real estate investment company would.
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Instructions
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Form a limited liability company. LLCs are a very simple form of business entity, and they are the ideal vehicle for investing in real estate with IRA money. To form an LLC, fill out articles of incorporation for your home state and mail the paperwork into your secretary of state's office along with the appropriate filing fee, typically $75 to $200.
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Execute an LLC operating agreement that allows your IRA custodian to be the sole member of the LLC. Operating agreements are the documents that govern the management and operations of an LLC. While operating agreements are not required by law it is a good practice to always have them in place, especially when making an IRA investment into an LLC.
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Find a self-directed IRA custodian that will allow you to invest in real estate. Custodians are the legal record keepers of all IRA funds. Not all custodians allow investors to invest in real estate. Once you find a custodian that will work with your investing goals, open an account and have them make the initial investment into the checking account of your IRA LLC.
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Go find some real estate investments. Now that your IRA custodian has invested your IRA funds into the checking account of your LLC, you can go out and buy property. It is legal to improve the property and "flip" it for a profit (which will remain in the IRA) or rent the property out (rental payments also go into the IRA).
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Do not create a prohibited transaction. When using IRA funds to invest in real estate you or your family members can not directly benefit from the real estate. Do not employ your family to work on the property and do not rent the property to family. Talk with a tax advisor about other prohibited transactions to avoid.
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Tips & Warnings
Not all IRA custodians allow the use of real estate IRA LLCs. They are, however, an IRS-recognized and completely legal investment tool. The IRS.gov website explains that "IRA trustees are permitted to impose additional restrictions on investments. For example, because of administrative burdens, many IRA trustees do not permit IRA owners to invest IRA funds in real estate. IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option.
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