IRA investment in real estate

[Guest SCUDDESLER]

My client has been told by her IRA custodian that she can create an LLC in which (1) her IRA owns 51% (which would constitute almost all of her IRA account balance) and (2) she personally owns 49%. The LLC's objective would be to purchase a single piece of real property--it happens to be a car wash. Apparently, since she will only personally own 49% of the LLC and there is apparently no attribution from her IRA to her personally, she is not treated as a controlling owner of the LLC and the exchange of cash (from her IRA) for the 51% interest in the LLC is not a prohibited transaction. Assuming her IRA custodian is correct to this point, the idea is then that she will create another entity, lets call it the "operating company." This operating company will lease the car wash (both the real property and the equipment) from the LLC. My client will be an employee of the operating company and draw a salary.

Is this possible? Does this scenario actually get around the prohibited transaction rules? It seems to me that this "suggestion" by her IRA custodian is courting a prohibited transaction. Does anyone else have any thoughts? Thanks.

[KJohnson]

I havent sat down and gone through the analysis, but it sounds like self-dealing to me which is a "smell test" rather than a mathematcial test of determining who is a party in interest ( or disqualified person in Code-speak). The custodian is probably trying to fit this into a variation of the Swanson case. You may want to look at this article:

http://www.trustsandestates.net/IRAsFLPs/I...m#_Toc518297320

[Guest SCUDDESLER]

Thanks, KJohnson. I'll take a look at the memo. I appreciate your suggestion.

[QDROphile]

Seems to me that the fiduciary is using plan assets for personal benefit, even if only because it leads to a job with the operating company. She is also using plan assets to acquire the car wash that she might not have been able to have a direct or indirect personal ownership interest in without the use of plan assets.

[mbozek]

The cleint needs to retain tax counsel to review the applicable rulings and opinion letters regarding ownership of the employer by the IRA and the IRA owner because custodians do not give legal advice.