If an IRA owner wants to set up a self-directed IRA, certain steps
must be followed. In order to set up a self-directed IRA, an LLC should
be formed to act as holding company for the IRA property. The LLC
should be incorporated where the IRA real estate is located. The LLC
should have a tax ID number and a separate checking account. The IRA
owner can be the member-manager. The members of the LLC can be the IRA
Custodian acting on behalf of the IRA owner and the IRA owner. The LLC
will be the purchaser and the mortgagor of the real estate purchased
with IRA funds.
The self-directed IRA must be set up with an
IRS-qualified custodian, and the IRA will have a custodian account
funded with IRA funds only. The IRA owner must comply with all
custodian requirements in timely manner. The IRA owner must report all
transactions, income, and expenses to custodian, in most cases before
the transaction occurs. The custodian will keep records of all
investments, transactions, contributions, and distributions and file
required reports with I.R.S.
The IRA owner must send contract,
title, closing, appraisal, and other documents to custodian for
approval and with wiring instructions to fund transaction. IRA funds
from the LLC bank account must pay closing costs, maintenance, mortgage
payments, and other expenses
A third-party property manager can
be hired and paid by with IRA funds. The IRA owner cannot be
compensated for property management, commission, accounting, or other
duties performed. Property-related expenses must be paid from LLC
checking account with IRA funds. No “self-dealing” is permitted, and
IRA funds cannot be co-mingled with personal or other funds.
Property-related income must be deposited into the LLC checking account
and becomes IRA-owned funds. The IRA owner can continue to make IRA
contributions to the custodian account in the full amount allowed by
I.R.S. The IRA contribution limits still apply, and the custodian keeps
track of contributions and report them to IRS.
According to the IRS, a “disqualified person”
cannot directly or indirectly buy, sell, or use the IRA real estate. A
disqualified person would be the IRA owner, the IRA owner’s spouse,
children, parents, and children’s spouses. A disqualified person would
also be fiduciary of the IRA owner, an entity owned 50% by the
above-stated relatives of the IRA owner, or a 10% owner, officer,
director, or highly compensated employee of such entity. The tax laws
prevent “self-dealing” between the IRA, the IRA owner, and disqualified
persons.
IRA real estate mortgages are usually 70% loan-to-value.
The IRA loan must be non-recourse. It is recommended that the IRA real
estate be appraised yearly to determine the actual value of the IRA
investment. The IRA property can be sold, and the proceeds from the
sale must be held in a separate account until they are reinvested. Net
income or gain from the non-leveraged portion of real estate is part of
the IRA and is not taxed. Net gains from sale of the leveraged portion
of the IRA real estate are taxable as capital gains.
Before
setting up a self-directed IRA, you should consult a tax professional
who is familiar with IRS laws relating to IRAs. Many accountants are
opposed to self-directed IRAs, because they are concerned about the
lack of IRS guidance on the subject. They are also concerned that the
IRS may eventually consider self-directed IRA investments to be taxable
IRA distributions.
Author: Jo Ann Joy
The foregoing is a general discussion only
and should not be relied upon as an opinion or advice on legal, tax,
investment, or other aspects of IRAs or self-directed IRAs.
Source: http://ezinearticles.com/?Self-Directed-Real-Estate-IRAs&id=191271
