Self-Directed Real Estate IRAs

If an IRA owner wants to set up a self-directedcannot directly or indirectly buy, sell, or use the
IRA, certain steps must be followed. In order toIRA real estate. A disqualified person would be the
set up a self-directed IRA, an LLC should beIRA owner, the IRA owner's spouse, children,
formed to act as holding company for the IRAparents, and children's spouses. A disqualified
property. The LLC should be incorporated whereperson would also be fiduciary of the IRA owner,
the IRA real estate is located. The LLC shouldan entity owned 50% by the above-stated
have a tax ID number and a separate checkingrelatives of the IRA owner, or a 10% owner,
account. The IRA owner can be theofficer, director, or highly compensated employee
member-manager. The members of the LLC canof such entity. The tax laws prevent "self-dealing"
be the IRA Custodian acting on behalf of the IRAbetween the IRA, the IRA owner, and disqualified
owner and the IRA owner. The LLC will be thepersons.IRA real estate mortgages are usually
purchaser and the mortgagor of the real estate70% loan-to-value. The IRA loan must be
purchased with IRA funds.The self-directed IRAnon-recourse. It is recommended that the IRA
must be set up with an IRS-qualified custodian,real estate be appraised yearly to determine the
and the IRA will have a custodian account fundedactual value of the IRA investment. The IRA
with IRA funds only. The IRA owner mustproperty can be sold, and the proceeds from the
comply with all custodian requirements in timelysale must be held in a separate account until they
manner. The IRA owner must report allare reinvested. Net income or gain from the
transactions, income, and expenses to custodian,non-leveraged portion of real estate is part of the
in most cases before the transaction occurs. TheIRA and is not taxed. Net gains from sale of the
custodian will keep records of all investments,leveraged portion of the IRA real estate are
transactions, contributions, and distributions and filetaxable as capital gains.Before setting up a
required reports with I.R.S.The IRA owner mustself-directed IRA, you should consult a tax
send contract, title, closing, appraisal, and otherprofessional who is familiar with IRS laws relating
documents to custodian for approval and withto IRAs. Many accountants are opposed to
wiring instructions to fund transaction. IRA fundsself-directed IRAs, because they are concerned
from the LLC bank account must pay closingabout the lack of IRS guidance on the subject.
costs, maintenance, mortgage payments, andThey are also concerned that the IRS may
other expensesA third-party property managereventually consider self-directed IRA investments
can be hired and paid by with IRA funds. The IRAto be taxable IRA distributions.The foregoing is a
owner cannot be compensated for propertygeneral discussion only and should not be relied
management, commission, accounting, or otherupon as an opinion or advice on legal, tax,
duties performed. Property-related expensesinvestment, or other aspects of IRAs or
must be paid from LLC checking account withself-directed IRAs.Jo Ann Joy, Esq., MBA, CEO
IRA funds. No "self-dealing" is permitted, and IRACopyright 2006 Indigo Business Solutions. All
funds cannot be co-mingled with personal or otherrights reserved.
funds. Property-related income must be depositedYou may contact Jo Ann by phone at (602)
into the LLC checking account and becomes663-7007, by fax at (602) 324-7582, by email at
IRA-owned funds. The IRA owner can continue tojoannjoy@Indigo Business Solutions.net, and by
make IRA contributions to the custodian accountmail at 2313 East Ocotillo Rd., Phoenix, AZ
in the full amount allowed by I.R.S. The IRA85016For more information about these and other
contribution limits still apply, and the custodianimportant business topics and for legal
keeps track of contributions and report them toconsultation, please visit our website at
IRS.According to the IRS, a "disqualified person"The future of your business starts here.