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Rakhi Vasavada
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
Satisfied Customers: 2126
Experience:  Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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I want to set up my small business where I take a minimum salary,

Customer Question

I want to set up my small business where I take a minimum salary, send the proceeds to my self directed IRA in which I want to purchase a rental property. Right now I am not set up as an LLC or a Trust. Do I need to do that, or can I continue using my setup as a Individual Sole proprietor. Most importantly how do I set up a self directed IRA where I can invest in real estate. What are the qualifications. I have identified a property I would like to purchase into this plan. Please provide a step by step on how to proceed in an optimal format.
Submitted: 10 months ago.
Category: Finance
Expert:  Megan C replied 10 months ago.

Megan C :

Thank you for your question, my name is Megan and I would be happy to help you.

Megan C :

You can continue your setup as a sole proprietor - an LLC or Trust is not required to do this.

Megan C :

In terms of investing in real estate in your IRA you have to be really careful. You need to have enough funds in your account to pay for repairs on the properties, pay taxes, etc - you can not pay bills on behalf of the IRA or else you will disqualify the entire IRA.

Megan C :

Also, you will have to set up an LLC to hold the real estate asset (this is separate from your business, which does not have to be an LLC)

JACUSTOMER-3dkr21dq- :

Let me start by saying that part of the money to purchase the investment would come from a loan. How do I set this up?

Megan C :

Well, the problem with that is that the IRA would have to get the loan. You could not personally guarantee the loan

Megan C :

SO, this might stop you dead in your tracks, so to speak. You cannot self deal - you cannot guarantee any loan, you cannot rent any portion of the property, you cannot pay bills on behalf of the IRA

Megan C :

If you can find a lender that would lend to the LLC without a personal guarantee, then you could do it. You will set up an LLC that will own the real estate, and then the LLC would get the loan

Megan C :

So, what you will need to do first is find a company that will allow you to have a self directed IRA.

Megan C :

Then, you will need to set up an LLC with the owner being your IRA

Megan C :

Then, find a lender who will lend to the LLC without a personal guarantee from you.

Megan C :

Find a property to purchase

Megan C :

Ensure that you have enough liquid funds in your IRA to pay for incidentals and expenses related to the property

Megan C :

Here are some articles on setting this up:

Megan C :

It's also important to think about the downside, which is talked about in the following article:

Megan C :

Do you have further questions?

Megan C :

If no further questions, please rate positive so that I may receive credit for assisting you today

JACUSTOMER-3dkr21dq- :

OK, I will consult with the websites for more info on how to accomplish this as it seems that it may not be your expertise. As a CPA maybe you can help me in understanding how much money I can pay (tax deferred) into a 401k plan to accomplish the real estate IRA transaction? I currently have a traditional IRA and Roth IRA. Would I need to create a new plan, and would I need to open that plan in 2013, or do I have until April 15th of 2014?

Megan C :

Thank you for your follow up. In a traditional and Roth IRA you are still only limited to $5,500 each year. In a 401(k) you can put up to 17,500 in the account per year. You could open a SEP IRA and put the lesser of 25% of your salary up to $51,000 in that plan.

Megan C :

You would need to create a new plan to do this, and it would have to be set up by the end of the year.

Megan C :

Remember, the plan needs to have enough cash to pay the mortgage, the related bills, and repairs. You cannot work on the property. You cannot manage the property. You cannot really touch the property at all. If something breaks, you can't just go in and fix it - you would have to hire someone to do that. If you did your own repairs that would be a prohibited transaction and doing so would make all your account balance deemed distributed with tax and penalties.

JACUSTOMER-3dkr21dq- :

It's my understanding that I can have a mortgage with a self directed IRA that I invest in Real Estate. Please confirm.

Megan C :

Yes, you can have a mortgage in the self directed IRA. Here's a link to a lender that specializes in this: http://www.iralending.com/

JACUSTOMER-3dkr21dq- :

For some reason I can't rate and allow them to credit your answer. Let me know.

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