Happening NowSelf-Directed IRA (Real Estate)

Can one lot be held 45 percent by a Roth IRA and 55 percent by the owner's LLC as tenants in common?

Here is a live scenario worth working through. An investor is under contract on a 6.2 acre infill parcel at $340,000 in a growth path suburb. The seller wants a 30 day close and will not split it. The Roth SDIRA has $154,000 available. A taxable LLC the investor controls, used on prior land deals, has $190,000. So the natural structure is tenants in common: the IRA takes 45.29 percent, the LLC takes 55.71 percent, the deed reflects both, and everything after that gets split at those exact percentages forever. What is confirmed: the custodian will hold an undivided TIC interest and has done them before. Their fee is $325 a year plus $95 per transaction, which on a land deal with almost no transactions is cheap. What is harder to get a clean answer on is whether the initial co-investment is itself a problem, since the same person controls the LLC and owns the IRA. The general reading is that a simultaneous purchase of undivided interests at proportional cost from an unrelated third party seller is a different animal than the IRA transacting with its owner. Counsel will usually say the same thing with more hedging, and then add that the purchase itself is the small risk; the real exposure is every single dollar that moves afterward. That is the right instinct, and it is why the structure deserves scrutiny. Carrying costs are roughly $4,100 a year in taxes and a mow contract. Hold period is probably seven to nine years until the sewer line extension gets funded. Exit is a sale to a builder, hopefully in the low sevens. The decision in front of the investor: sign the TIC structure, or buy the whole thing with the LLC, leave the Roth out of it, and lose the tax-free treatment on the best appreciation asset in the portfolio. Earnest money goes hard within days.

luis_carrera CS1CPRO 12

Answer

kevin_lombardPassivePRO

I'm new enough that I read this thread twice, and the part that stuck out isn't the purchase. It's the exit.

If you and the IRA own it together, you both have to sell at the same time, to the same unrelated buyer, at the same price per percentage point. You can't buy the IRA out later when the builder offer looks good and you'd rather have the whole thing in the LLC. You can't refinance one side. And if the builder wants to option 3 acres instead of buying all 6.2, that gets complicated because the option has to be against the undivided whole, not against your half.

So the question I'd ask your attorney in the week he's asking for isn't whether the purchase is clean. It's whether every plausible exit is clean. Seven to nine years is long enough for the plausible exits to change shape, and you're locking both owners into moving in lockstep the whole time.

The carry money @ehernandez74 raised is the other thing. That's a real number you have to fund from inside the account and you can't top it up beyond contribution limits.

kevin_lombardPassivePRO

3 replies

ehernandez74 PC3BPRO 12

Seven to nine years of carry with the IRA funding 45 percent of $4,100 a year is about $1,850 annually out of the Roth, plus the custodian fee. Where's that coming from, if the IRA has $154,000 available and the buy uses $154,000 of it? If the IRA can't pay its share of the tax bill on time and someone else pays it, that's the exact problem the attorney is warning about, on year one. Size the IRA share at whatever leaves twelve years of its own carry in cash. Which probably means the IRA takes 38 percent, not 45.

ehernandez74 PC3BPRO 12

brandonlee36 SP1BPRO 15

@kevin_lombard naming the exit is the right catch, and it's worth pushing further. Ask about partition rights too. If something happens to the LLC owner personally and that interest goes to an estate, the IRA is suddenly co-owned with people who aren't part of the original agreement. A small practical point on TIC structures: get the tax bill split at the county level if the county will do it, so each owner receives a separate bill for their percentage. Many counties won't do this, which leaves one owner paying and the other reimbursing, and reimbursement is exactly the mechanic that can't be used inside an IRA. That detail varies county to county and is worth a phone call before Friday. Honestly, at 30 days with an attorney who wants a week, the better move is asking the seller for an extension rather than signing into a structure that can't be unwound.

brandonlee36 SP1BPRO 15

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