Getting Around Prohibited Transactions August 31, 2009
Posted by Jeff Nabers in real estate, Self Directed IRA/401k.Tags: 4975, house, individual 401k, internal revenue code, ira, ira llc, irc 4975, law, laws, llc, loan, prohibited transaction, real estate, retirement, retirement account, retirement plan, self directed, solo, Solo 401k, solo k, strawperson, uni k
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Prohibited transactions is a chief topic when exploring self-directed IRA & Solo 401(k) investing. When a person first discovers that his retirement accounts have been chained to Wall Street brokerages without necessity, his mind starts to imagine the possibilities.
Real Estate? Yes.
Private Businesses? Sure.
Precious Metals? Absolutely.
Getting my hands on my retirement money now? Slow down there.
There are two types of limitations on the average retirement account. One is an unnecessary restriction of investment options to securities products. That can be eliminated through restructuring your accounts and funds. The second limitation is legal and cannot be removed.
Setting up a self-directed IRA or 401(k) is about removing limitations. Once you have it setup outside the nearly monopolistic network of securities dealers, you can invest in almost anything… but you must fully understand the legal limitations.
The general premise behind prohibited transaction rules is that the government wants you to grow your retirement account as big as possible because they plan to tax it later on when you distribute the funds to yourself for spending. Without prohibited transactions rules, anyone in their right mind would (more…)
Book Announcement: UNLIMITED INVESTING March 31, 2009
Posted by Jeff Nabers in Money, Precious Metals, real estate, Self Directed IRA/401k, Uncategorized.Tags: alternative, alternative assets, alternative investments, book, chongchua, depression, economy, gold, ira, ira llc, jeff, llc, nabers, phoebe, proof, real estate, recession, self directed, self employed, solo, Solo 401k, solo k, unlimited investing, wall street
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In case you haven’t heard through the grapevine, my new book, UNLIMITED INVESTING With a Self-Directed IRA LLC or Solo 401(k): Break Free From Wall Street To Build Real Wealth With Alternative Investments, will be available soon.
I’ve joined (more…)
Is my home an investment? March 18, 2009
Posted by Jeff Nabers in real estate, Self Directed IRA/401k.Tags: 401k, bernanke, builder, buyer, clinton, consumer, fannie mae, fed, finances, financial, FNMA, greenspan, home, house, income, invest, investing, investment, ira, ira llc, llc, planner, primary, property, real estate, realtor, recession, residence, self directed, seller, solo, Solo 401k, spending
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Recently I received a question from somebody looking into self-directed IRA/401(k) investment for themselves. They said, “I ran this by my financial planner in New York who said to roll over my IRA to put some of its money into my home is illegal.” This statement is technically correct. Putting IRA money into his primary residence would be a prohibited transaction. The disturbing thing about the situation is that these three people (a person, their realtor, and their financial planner) could all be on the same page about something so fundamentally ridiculous.
The misconception
In the past 10 years, many people think “real estate investing” equals “putting money into my home”. Their home can’t be an investment in the first place because they are paying for it rather than having it paid for by a renter.
When somebody wants to help people rationalize buying the stuff they sell, they often call it an “investment”. Bill Clinton started changing the way people thought about government spending (when he was increasing it) by calling it an investment.
An investment or a consumer product?
Selling a primary residence to a home buyer is selling a consumer product. It’s for their use. They can buy what they really need. Or they could get extravagant and buy the Lexus/Mercedes version of a home and spend more. Either way, it’s a consumer product if they are paying for it and using it themselves.
But realtors followed Clinton’s spin move and started calling home buying an investment. This really caught on once Fannie Mae, Freddie Mac, and the Fed all took actions to artificially inflate home prices in order to defer the recession of 2002. Once you could buy this consumer product (the home) and then have it rapidly increase in value (supposedly) and realize this value by selling it or doing a refinance cash out, then the talk about the home being an investment seemed to make sense.
Today, the bubble is over, and the illusion that your home is an investment should be easy to correct. If it was an investment, then somebody else would be paying the mortgage. If somebody else was paying the mortgage, they’d probably live in it instead of you.
It’s not to say that buying a home is a stupid thing to do. That can only be decided on a case-by-case scenario that depends on the buyer and the home in question. Buying a home can be a financially beneficial thing to do in some cases, but it hardly could be truthfully classified as “real estate investing”.
Back to basics: real estate investing means buying properties that produce income. And, yes, real estate investing can be done inside an IRA or 401(k). :-D
Where to form your LLC for virtual or foreign business activities September 17, 2008
Posted by Jeff Nabers in real estate, Self Directed IRA/401k.Tags: 401k, invest, investment, ira, limited liability company, llc, nevada, nexus, NV, OR, oregon, ownership, real estate, self directed, solo, Solo 401k, strategy, tax, tennesee, TN, WY, wyoming
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When you form an LLC (or Corporation), it is registered and created at the state level. You can choose to form an LLC in any state, regardless of your state of residency.
Nexus
When you have business activity that clearly occurs in a specific state, you are said to have “nexus” in that state. If your LLC has nexus in a state, it will probably need to register itself in that state and pay any applicable taxes for doing business there. An LLC is a pass-through entity, meaning it is designed to have zero taxation because income taxes are paid by the LLC owner(s) on their tax return. Unfortunately, some states have created franchise and/or excise taxes that can be costly.
Virtual Businesses
If you are starting an internet business (or any other business that doesn’t create nexus in a specific state) you can choose to form your LLC in a state (more…)
Entity (LLC) Maintenance – Keeping your Corporation or LLC Legitimate July 10, 2008
Posted by Dan Marsh in real estate, Self Directed IRA/401k.Tags: 401k, asset protection, corporation, documents, entity, invest, investing, ira, ira llc, liability, limited liability company, llc, maintenance, meetings, pierce, protect, self directed, veil
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****** A note from Jeff Nabers ******
I asked attorney Dan Marsh to shed a bit of light on entity maintenance and its importance. With a general purpose LLC, failing to properly maintain the entity can result in “piercing the veil” which means subjecting creditors to assets of the LLC owner(s). With a special purpose IRA LLC, “piercing the veil” could mean a prohibited transaction resulting in hefty taxes, penalties, and interest.
Entity maintenance is important and it shouldn’t take too much time or money… yet it could save you a lot of time and money in the long run. I suggested Dan keep this post brief, but instead he did what attorneys are supposed to do: he was thorough. Rather than ask him to dumb it down and shorten it, here’s the article in its entirety…
*************
Asset Protection: Multiple LLCs July 1, 2008
Posted by Jeff Nabers in real estate, Self Directed IRA/401k.Tags: 401k, apartments, asset protection, assets, corporation, estate planning, invest, investing, ira, liability, limited liability company, limited liability corporation, llc, protect, real estate, safeguard, self directed
11 comments
LLC stands for limited liability company, and that is the primary purpose for forming such a legal entity. When you enter into a business transaction as an individual (aka sole proprietor), if somebody decides to sue you, all of your personal assets can be subjected to satisfying the law suit. The idea behind an LLC or Corporation is that people are doing business with that entity (the LLC, for example). When a true separation is maintained between the LLC and its members/owners, the LLC can only lose its assets… but not the unrelated assets of its owners.
The cross-liability of one LLC with multiple assets or businesses
Jeremy forms JAH LLC to buy and hold apartment buildings. He buys Apartment Building A as well as Apartment Building B & Apartment Building C.
An accident occurs and somebody gets hurt in the common area of Apartment Building A. This person sues the owner of the buildings, JAH LLC.
Personal assets – Jeremy’s personal assets are protected from exposure to this law suit (except for what he contributed into JAH LLC).
Apartment Building A – All of the assets of JAH LLC can be exposed to satisfying the law suit. This includes bank accounts relating to Apartment Building A and even the real estate itself.
Apartment Building B – All of the assets of JAH LLC can be exposed to satisfying the law suit. This includes bank accounts relating to Apartment Building B and even the real estate itself.
Apartment Building C – All of the assets of JAH LLC can be exposed to satisfying the law suit. This includes bank accounts relating to Apartment Building C and even the real estate itself.
The additional protection of multiple LLCs
Jeremy forms (more…)
What’s so special about the IRA LLC? June 9, 2008
Posted by Jeff Nabers in Self Directed IRA/401k.Tags: compliance, compliant, custodian, facilitator, ira, ira llc, irs, limited liability company, llc, minutes, operating agreement, prohibited transaction, self directed, special purpose
20 comments
Ahhh… the single most mis-answered question in the self directed IRA world:
Customer: I’ve noticed it costs more to setup an IRA LLC than it does a general purpose LLC. What’s so special about the IRA LLC?
LLC Facilitator: The Operating Agreement has special language. Putting together an IRA LLC without this magical language will result in a prohibited transaction and hefty taxes.
This is untrue. While it’s advisable to include special language in a special purpose LLC (one that is intended to be owned by an IRA and managed by the IRA accountholder), the absence of such language will not create a prohibited transaction in itself. Believe it or not…
Any newly created LLC can be used with an IRA!
…without necessarily creating a prohibited transaction. The sales pitch that you need the special purpose operating agreement is bogus.
That said, it is still advisable to have an IRA LLC established for you by a company experienced and competent in such facilitation. Not because you have to, but because you should want to. Why?
You want things to look good in the event of an IRS audit
This is probably the main reason why you should have an IRA LLC formed for you by a specialist instead of doing it yourself. If you get audited, the IRS is going to have a first impression about your IRA LLC structure. If it looks like you did everything compliantly and your documents pro-actively address most compliance issues, the IRS’s first impression may be friendly. If it looks like you just threw the LLC together with little regard for compliance, this may negatively affect the IRS decision of how long and excruciating the whole ordeal will turn out to be. This is an important issue. Notice I said “looks like”. Regardless of how compliant you are, (more…)
Landlording your IRA LLC’s properties – Is it allowed? May 30, 2008
Posted by Jeff Nabers in real estate, Self Directed IRA/401k.Tags: 401k, checkbook control, code, condo, dol, exemption, house, investment, ira, ira llc, irs, landlord, landlording, llc, prohibited transaction, property, real estate, regulation, repair, self directed, tax, taxes, treasury
7 comments
A question I get all the time is “Can I personally mow the lawn, maintain, and/or repair properties owned by my IRA LLC?” My answer is “No” which usually creates the response “But another company said I could.”
First, let’s summarize that the accountholder/participant of a retirement plan generally can’t have a transaction between themselves and their retirement plan. This includes the furnishing of services, sale of property, lending of money, and extension of credit between a plan and disqualified person (such as the accountholder). Next, let’s establish that active landlording means mowing the lawn, repairing, and fixing up properties, while passive landlording means collecting rent, paying mortgages/taxes/insurance, and contracting out the more active tasks to non-disqualified-persons. So is active landlording allowed? No, and I’ll provide two answers – the technical and the layman’s.
The Technical Answer
The argument for why active landlording for your IRA LLC’s property is not a prohibited transaction goes something like this…
As a general rule, the Internal Revenue Code provides (more…)
LLC Registration – Choosing a state May 7, 2008
Posted by Jeff Nabers in Self Directed IRA/401k.Tags: 401k, delaware, foreign, ira, llc, nevada, register, registration, self directed, state, wyoming
1 comment so far
For many small businesses forming an LLC in your home state is the simplest and most convenient option. An LLC that does business in a state other than where it was initially registered must register as a “foreign LLC” (foreign meaning from a different state, not a different country) with the state in which it conducts business.
When an LLC is registered with a state, a registered agent must be named. This is the person or corporation designated to accept official documents on behalf of the LLC. This person or corporation must reside in the state of formation. If you are registering an LLC in a state in which you don’t reside, you’ll need to choose a person or corporation residing in that state to serve as your registered agent. There are many companies who provide a registered agent service for a nominal fee.
There are advantages to choosing certain states in which to initially register your LLC. Many large corporations choose to form an LLC in Delaware because (more…)
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