Question on IRS Rules Regarding LLCs and Self Directed IRAs

Q. My wife and I were impressed with your life experience as well as your business knowledge. We recently attended your  Seminar in Jacksonville, FL. I have recently been advised that the IRS is after the big 12 this year and one of them has to do with LLCs that are using Self Directed Traditional or Roth IRAs for investments in real estate. I have several questions regarding investing using a Self Directed IRA and I have been informed that if I invest this way I do not need to set-up an LLC. I cannot understand how we are protected without forming an LLC and having by laws, minutes etc. to protect us as you discussed in the seminar. Is it true that I do not need to setup an LLC and that the IRA protects me from harm?

Thanks, Curtis

Hi Curtis,

A. Thanks for the testimonial.  I’m glad you enjoyed the seminar.  In answer to your question, it is easy to find the IRS Dirty Dozen for each year. Simply go the IRS website by typing www.irs.gov.  You then enter a search for “Dirty Dozen.” Then select which year you are interested in. The IRS has a complete explanation of the “dirty” procedure and why they are attacking it.

As to your questions about how IRAs and LLCs work together, the IRA by itself is protected from most creditors and lawsuits. The government has a strong interest in protecting people’s retirement.  The U.S. Supreme Court ruled in April 2005 that IRAs receive protection from Federal Creditors. This means that creditors including the government cannot seize assets in an Individual Retirement Account.

What this protection means is that as long as you are investing the funds held in your IRA you are protected.   But if you need to borrow money to complete a transaction, you will need to use an LLC or Corporation in your IRA to borrow that money.  If you borrow money that the IRA doesn’t have, it is considered self dealing and it is illegal.  For example, say you want to purchase a piece of rental property in your IRA.  If you can pay cash or if you can get a non-recourse loan, you are OK. But if you need a loan, then you need to form either an LLC or a corporation to get the loan.   If you use an LLC in an IRA, it needs to contain certain language.   So don’t think you can use just any LLC.  Please be careful because the IRA/LLC combination is on the IRS dirty dozen this year.  Get an attorney and do it right.