Tag Archives: Direct Ownership

Self-Directed IRA & Qualified Plan Information, Self-Directed Roth IRA, Self-Directed Traditional IRAs

Can you provide input on IRA Owned LLCs?

Question: Quincy can you give us input on whether we need to set up an IRA LLC or is there a better entity for self directed IRA’s? Is selling interest in a LLC the best way to pool IRA money?

Answer: The question of whether to set up an LLC for a particular transaction or series of transactions depends on a lot of factors.  For example, are you going to use the LLC for transactions on a regular basis, or is the LLC set up for a single transaction?  What is the cost of setting up the LLC in the state where you are located?  Are there any income or annual fees to maintain the LLC?  How much will the LLC cost to set up and maintain?  As I always say, “every port of refuge has its price.”  You simply have to analyze the costs and decide whether or not it is worth forming an LLC for your anticipated investments.  I have seen many people use trusts as a viable and less expensive alternative to LLCs, but once again there may be state law issues which affect your decision.

Another question is who will manage the LLC?  Personally, I believe it is not a great idea for an IRA owner to manage an LLC which the IRA owns, for a lot of reasons.  I understand that guidelines on IRA owned entities have been written by the Department of Labor and are under review by the IRS prior to being released sometime later this year.  These guidelines will hopefully shed light on a lot of the issues facing IRA owned entities.

Another factor to be considered is whether or not the operation of the LLC will subject the IRA to Unrelated Business Income Tax (UBIT).  If an IRA operates a business, either directly or through a non-taxable entity such as an LLC, the owing IRA will be subject to taxation and will need to file a Form 990T each year (unless that LLC elects to be treated as a C corporation for tax purposes).  This may impact the return and complicate matters somewhat, but does not at all mean the project shouldn’t be considered (I have investments in my retirement plan that require me to file a 990T each year).  It is conceivable or perhaps even probable that the continuous purchase and sale of notes in the LLC would cause the owning IRAs to owe UBIT, if that is your intent.  You should note that no disqualified person (including, but not limited to, the IRA owners and their immediate familymembers) may receive any current benefit from the transactions engaged in by the LLC.  For example, no commissions may be earned by any disqualified person for purchasing notes within the LLC.

The answer to your second question has significant Securities and Exchange Commission issues, so if you form an LLC and sell its shares you will want to be careful not to make it a “public” offering, or at the very least you should consult with a securities attorney prior to raising capital.  A full discussion of the securities law implications is beyond the scope of a quick email, and is subject to who the members of the LLC are and how they acquire the membership interests.  I have used both trusts and LLCs to accumulate funds for investments, but I have always dealt with immediate family members and close associates, not the “public.”  I am not an expert on securities laws, I just know enough to be dangerous.

Of course you should also realize that any particular asset may be held directly by an IRA as opposed to owning the asset through an LLC.  Depending on the complexity of the transaction and the volume of activity, direct ownership by the IRA or IRAs may be sufficient to meet your needs.

I apologize for the delay in answering your questions. If I can do anything for you, please let me know.  Have a great day!

Self-Directed 401(k), Self-Directed IRA & Qualified Plan Information

Debt Financed Property in a Self-Directed 401(k) and UBIT

Question: I attended the seminar with you, Dyches Boddiford, and Hugh Bromma about a year ago.  I was reading the transcript of your February 4 radio interview which was very interesting.  You mentioned the need to file a 990T for your 401K with regard to a debt financed shopping center that your plan owns.  I wondered if that is correct because I thought it was unnecessary to file a 990T for a 401K, especially since there is no UDFI tax on a 401K.  Is there an advantage to filing one in such a situation?

Any insight you could give me on this would be much appreciated.  I have a debt financed property in my 401K so this is a particular topic of interest to me.

Answer:  Yes, the information about the 990T is correct in this case.  The exception you refer to requires either direct ownership by the 401(k), ownership through a special type of corporation, or ownership through a specially designed partnership.  Since most partnerships where non-retirement plans are also partners do not meet the special requirements to maintain the exemption, as mine does not, your plan may still owe UBIT and have to file a 990T.  As noted in the interview, this can still work out great, but you should always go in with your eyes open.  And yes, even if you do not owe UBIT taxes filing the 990T may be of some benefit, since you can carry forward a loss to offset future UBIT from the investment.  For the past two years the partnership my 401(k) invested in has shown a slight loss, but this year it will show a fairly decent profit, and I will use my loss carry forward from the last couple of years to offset the tax.

I have some articles I wrote on the topic, but right now I am in an airport on my way to Florida, so I can’t access them.  I will be back in the office next Wednesday.  The exemption and the restrictions on it may be found in Internal Revenue Code Section 514(c)(9).

I hope that helps some.  Have a great weekend!

H. Quincy Long’s UBIT Paper

Self-Directed IRA & Qualified Plan Information, Self-Directed Roth IRA, Self-Directed Traditional IRAs

Can you write off large investment loses in an IRA?

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Question: I made a large (nearly 6 figure) investment in my self directed IRA account in an oil & gas investment (direct ownership WI in 3 oil wells). The entire investment is gone as the principals behind it scammed everybody & offshored most of the funds. Can you claim a loss on a IRA account investment gone bad?

Answer: I am sorry you experienced a loss in your IRA but thank you for your inquiry.  To answer your question, you may be able to claim some of your loss on your personal tax return in this case, but there are significant limitations.  The rules are discussed on page 41 of IRS Publication 590 for 2010 in the paragraph entitled “Recognizing Losses on Traditional IRA Investments” which you can download from www.irs.gov.  To summarize briefly the rule, you may deduct the difference between the total amount of your remaining after-tax contributions in the account (your basis) and the amount withdrawn from your traditional IRAs as a miscellaneous itemized deduction subject to the 2% of adjusted gross income floor on your Schedule A.  In other words, if the amount of non-deductible contributions in all of your IRAs was $10,000 and you closed all of your traditional IRAs down with zero money coming back to you, you would be able to claim the $10,000 on your Schedule A to the extent it exceeds 2% of your adjusted gross income for the year.  Any such deduction is not counted when calculating the Alternative Minimum Tax, so if you are subject to that tax it may not do you much good.  Note that it is only your unrecovered basis (after-tax contributions) in your IRAs that you can base the loss on, not the actual amount you lost in the deal.  If you had no unrecovered basis in your traditional IRAs, you cannot take the loss.  The rationale for this seemingly harsh rule is simple – if you never paid taxes on the money you lost you cannot deduct the loss from your taxable income.  Also, as noted above, the only way you can take such a loss is when all of the amounts in all of your traditional IRA accounts have been distributed to you and the total distributions are less than your unrecovered basis in the account.

As you can see from the answer to your question, the rules are a bit complex, so you will absolutely want to work with your CPA or other tax advisor to see the tax effect in your individual situation.  Although I can give you the general rule, I cannot give you tax advice.

In an unrelated issue, I wanted to make you aware that if you purchase a working interest in an oil and gas well (as opposed to a royalty interest) in your IRA in the future, any income may be subject to unrelated business income tax (UBIT), and your IRA would need to file IRS Form 990T.  While this does not mean that you should not make the investment necessarily, you should understand the tax implications for your IRA prior to entering into this type of investment.  A careful analysis may reveal that such investments are better made outside of the IRA, since there may be significant tax deductions available to you.  You may find more information on UBIT from IRS Publication 598.

If I can assist you in any other way, please let me know.  Have a great day!