Can I Partner My Self-Directed IRA?

Video: Partnering Self-Directed IRAs

Purchasing property in an LLC in a self-directed IRA

A self-directed IRA can own an LLC, which provides several advantages for investors, particularly in real estate. At Equity Trust, we refer to this as a Real Estate Checkbook IRA LLC. By setting up an LLC within your self-directed IRA, you gain direct control over your investment decisions and transactions, allowing for greater speed and flexibility.

This structure enables you to write checks directly from the LLC’s bank account to purchase properties or pay for expenses, without needing to go through the IRA custodian for each transaction. This can be especially beneficial in competitive real estate markets where timing is crucial.

However, it’s important to be aware of the legalities and IRS rules associated with using an LLC in a self-directed IRA. The LLC must be a single-member entity, wholly owned by the IRA, to maintain its tax-advantaged status. The IRA owner, while often acting as the manager of the LLC, cannot receive compensation for managing the LLC or engage in any transactions that would be considered “self-dealing,” which includes investing in assets that directly benefit the owner or other disqualified persons.

Proper adherence to these rules is essential to avoid penalties and preserve the tax benefits of your self-directed IRA.

Isn’t partnering with myself or family members a prohibited transaction?

While the premise of partnering is somewhat like a prohibited transaction, they’re two different scenarios. The difference is based on who currently owns the property or investment. If you, a family member, or other disqualified person already owns a property, then investing in that property with your IRA is prohibited.

However, in the partnering scenario, if you and a family member or other partner want to purchase a new property that’s not already owned by a disqualified individual, this is not a prohibited transaction.

A partnering example with your self-directed IRA

Let’s assume that the property you want to purchase costs $100,000, but your self-directed Roth IRA has only $20,000. You reach out to a friend of yours who has $30,000 in a traditional IRA and a business associate who can invest $50,000 of his own money. Combining the money together, you now have sufficient funds to purchase the property.

Your self-directed Roth IRA now owns a 20-percent interest in the property. Title for the property reads:
Equity Trust Company Custodian FBO [Your Name]

Roth IRA 20% Undivided Interest
Going forward, your self-directed Roth IRA is responsible for 20 percent of all expenses related to the property. Similarly, your self-directed Roth IRA receives 20 percent of all income generated by the property.

A year after purchasing the property, you and your partners decide to sell it for $150,000. With a 20-percent interest, your self-directed Roth IRA receives $30,000 or 20 percent of the sale proceeds—an amazing 50-percent return ($10,000 profit) on your original $20,000 investment.

As you can see, even without a large bankroll to start out, you can still create profitable real estate investments with your self-directed IRA.

Note: While this type of transaction is straightforward and common, you’ll want to make sure it’s at “arms-length” and that you avoid the possibility of “self-dealing,” both of which are prohibited by IRS regulations. Consult with a financial or tax professional.

Other ways to partner for a purchase

The above is just one way to potentially partner your self-directed IRA. Learn about other potential options: Discover 6 Ways to Partner Your IRA.

Partnering with a self-directed IRA offers a viable way to invest in real estate even if you don’t have enough funds to purchase a property outright. Be sure to consult with a financial or tax professional to ensure all transactions comply with IRS regulations and to explore all your options for building wealth with a self-directed IRA.