Roth IRA buying 51% share in Real Estate owning LLC

[Guest deepdrinker]

My Roth IRA made a Loan to the 51% owner of an LLC that owns and manages real estate. We want to convert that loan to a purchase. The real estate is mortgaged and the lender is OK with that but wants me to become a "Key Principal". Is that a Prohibited Transaction? (If so, The borrower/seller is willing to remain as the Key Principal, and lender says OK.)

Also, how are distributions treated? Are they UBI? What are the tax considerations? What about if either the LLC or the property is sold; is the gain taxable?

The Custodian Company pushes Roth IRA RE investments but doesn't mention anything about UBI being taxable.

[John G]

Real Estate dealings that involve IRAs or Roths are sort of the black hole of accounting. First, they are extremely rare. Second, most custodians won't let your go anywhere near there because they want easy accounts and want to avoid any exposure to law suits.

If you are relying upon accounting, legal and tax advice on real estate transactions in an IRA/Roth from an interenet message board, I think you have crossed the Rubicon.

If you can't find an accountant or tax attorney that actually has experience in this area in your home town, then I suggest you don't undertake the transactions.

We occasionally get posts about real estate. Most of them seem to have special circumstances or "arrangements" that raise lots of issues with accountants. If all you wanted to achieve was some portfolio diversification, you have other ways to reach that goal thru mutual funds, REITS, etc.

[david rigby]

If you are relying upon accounting, legal and tax advice on real estate transactions in an IRA/Roth from an interenet message board, I think you have crossed the Rubicon.

Maybe not. Other sources are still available. Of course, John's advice is on point: get competent legal advice.

BTW, not knowing "Rubicon", I found this on wikipedia:

Crossing the Rubicon is a metaphor for deliberately proceeding past a point of no return. The phrase originates with Julius Caesar's invasion of Ancient Rome when, on January 10, 49 BC, he led his army across the Rubicon River in violation of law, hence making conflict inevitable. Therefore the term "the Rubicon" is used as a synonym to the "point of no return".

[Guest deepdrinker]

Thanks for the comments.

Although I got a tax attorney's (prominent NYC firm) written opinion giving me the go ahead, stating that the Roth IRA wouldn't be subject to UBTI or even UDT (?) but because it is such a maze and because the mortgage would require considerable fees -- and the annual fees from the Custodian, and that the party i'd be buying out would have to retain some "shadow" interest, etc. I'm going to do the deal with mostly non-IRA funds plus some withdrawn from the Roth. That way the fees from the mortgagor would be minimal.

[John G]

Cross the Rubicon ~ you got the reference correct. It means you have acted or committed and can no longer unravel what you have done. The Rubicon is a river in Italy. The law was designed to protect the current regime...you could not bring your legions into Rome.

- - -

Getting a written opinion of an attorney or accountant is sometimes only a start. What if they are wrong. Did there opinion give them an "out"...are you covered by errors and omissions insurance?

There are a lot of folks that thought an extended warranty by Chrysler was a fine thing. Well, that depends, doesn't it.

I have an attorney in town that no longer will set up a settlement based upon assets held by a single bank or insurance companty. He nows takes the total and divides it into 3 or better yet 5 packets. Its a way to manage client risk. Ten years ago he assumed that insurance company ratings and FDIC coverage was all he needed to know. And, he made that change in his practice years before Enron, AIG, Leyhman and Bear Stearns.