Discussion:Self directed IRA invests in LLC - UBTI?? (also Self Dealing? prohibited transaction?)
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Discussion Forum Index --> Tax Questions --> Self directed IRA invests in LLC - UBTI?? (also Self Dealing? prohibited transaction?)
January 3 2007 | |
| Want to confirm my thinking here - An attorney wishes to start a self directed IRA to invest in an LLC owned by two members: One of the members is her client. The attorney is not related to the client and has not done any paid work for the LLC or received any compensation from the LLC. Does this run afoul of any self dealing or prohibited transaction rules? Seems OK.
The question I cant get a clear grasp: this LLC will be profitable. The LLC has no debt or debt service. If the IRA purchases (say a 40%) interest in this LLC, and the LLC will be distributing a $50k profit, will the LLC's profits create UBTI liability? If so, can the UBTI liability be avoided somehow? Such as by keeping the profits within the LLC and not distributing it, just increasing the value of the LLC? | |
| 3 January 2007 | |
| Hi you have several issues 1) the IRS requires all assets in a IRA to be valued at every year end. The IRS states that IRA assets must be valued annually regardless of how hard they are to value and "the person responsible for insuring that an IRA's assets are properly valued is the IRA trustee or issuer" So for this reason your client may not find a trustee willing to do his "self directed" IRA. This is also a problem when the IRA owner becomes 70 1/2. 2) Whether or not the attorney is a disqualified person is open for discussion. If he particicpated in the set up of the partnership or gives advice to his client may taint the transaction. Is he going to get any legal fees from the operation? You did state no to this issue but the IRA trustee could be subject to lawsuit by the IRA grantor if the grantor was not "warned". Again another reason your client may not find a trustee. 3) UBTI again the IRS has made it clear that the trustee is responsible for filing Form 990-T and paying the taxes. Many trustees feel this is not their responsibility not true. You note no debt financing so maybe not a problem. If the LLC is taxed as a partnership I dont see how it cannot be "distributed" or not passed through. 4) The trustee not the IRA grantor must be signing all the documents at the closing. Anyways all this info came from an article titled "You want to do what with your IRA?" ABA trust & Investments may/june. Sounds like the trustee may nix the whole deal. bye | |
| 3 January 2007 | |
| Hi my main IRA source book states a business operated by a pass through entity is UBTI regardless of whether the IRA owned entity controls the pass thru entity. cites 512(c)(1). bye | |
| January 3, 2007 | |
| Yeah, I thought that IRA's were prohibited from owning flow thru entities. Maybe it's as Wes says, not illegal, just all UBTI, making it moot. Only C corps, and even that has lots of problems. www.pensco.com | |
| 3 January 2007 | |
| so basically theres no tax benefit to investing in a (non-real estate) LLC through a self directed IRA? | |
Mtmckeecpa (talk|edits) said: | 3 January 2007 |
| Sis,
Unless I can find other support or backup, and right now I can't, I would say that an IRA investment in an operating business LLC, taxed as a partnership, is subject to UBTI. As Wes stated, if it is a partnership, you can't NOT choose to distribute the profits/losses. They are distributed. If this LLC happens to be a C corp and you are buying stock, I see no UBTI issue here (not forgetting Wes' comments about PTs). If you believe you need to file a 990-T on this, at trust rates, I would look at the expected after tax rate of return as one factor to analyze whether or not this investment makes sense within the IRA. | |
| 4 January 2007 | |
| thanks all - further question: if you segregate/split investments, so each are under the $1000 UBTI threshold, do the profits of ALL the investments in the self directed IRA get aggregated?
example: Could one invest in multiple smaller interests (of the same or different LLCs), each of which generates less than $1000 UBTI , to avoid UBTI entirely? | |
Mtmckeecpa (talk|edits) said: | 4 January 2007 |
| Sis,
Interesting question...never thought of that. I would think you would aggregate them under one 990-T. | |
| 8 January 2007 | |
| whos Norm? =)
any other opinions on whether multiple investments, generating less than $1000 UBTI each, must be aggregated? | |
Ilovedangerousdogs (talk|edits) said: | 2 February 2010 |
| I just got one of these in today. I may give it back. Seriously! | |
