ROTH IRA LLC

[Guest Jessica Mays]

I have a question regarding prohibited transactions and a Roth IRA, LLC. I have an owner of a building who wants to transfer the building to an LLC at fair market value. The owner of the building still wants to occupy the building and pay fair market value lease income to the LLC under a triple net lease.

The tentative plan is the members of the LLC will all be ROTH IRAs, including a ROTH owned by the original owner of the building. The ROTH IRA owned LLC may eventually own 10-20 buildings all structured as indicated above, meaning all the ROTH’s will be owned by the former owners of the commercial real estate.

This appears to be a series of prohibited transactions since the owner of the building is technically the LLC, the LLC is owned by ROTH’s which are owned by the buildings tenants and former owners. Do you agree or is there a way to structure the arrangements to not violate the prohibited transaction rules? Would the answer be different if the LLC was only owned by 2 ROTHs’? 50 Roth’s?

[Guest Rajeev]

Jessica,

Under IRC Section 4975 this would be a prohibited transaction, under the context of "Owner of the ROTH IRA cannot do business with his/her ROTH IRA". A ROTH IRA invested in an LLC is acceptable, the LLC can then hold real assets in the LLC. But the LLC cannot turn-around and lease the property to the ROTH IRA Owner --- this is the prohibited part of the transaction.

Additionally, the LLC cannot purchase any property currently owned by the ROTH IRA Owner --- this is also prohibited.

The LLC is permitted to purchase any property from any non-disqualified party, even using leverage... provided the leverage is not guaranteed by the ROTH IRA Owner.

Hope this helps..