Tax Liens in an IRA LLC
By Jordan Sheppherd
We were asked the following question the other day on the phone:
I really want to take advantage of the massive profits to be made in tax liens but Iʼm having difficulty in doing so with my Self Directed IRA, can I do tax liens in an IRA LLC?
Here is our answer:
Absolutely. In fact this is one IRA investment with which the self-directed IRA really gets the help it needs by the addition of an LLC. Actually, itʼs really the ONLY way an IRA can be successful in buying tax liens. The problem in buying these wonderful IRA investments is that you must move quickly and be able to either pay via cashierʼs check immediately or within 24 hours. A self-directed IRA is just not nimble enough to respond in time to garner the profits from these profitable investment opportunities.
Tax Liens in a Self-Directed IRA
Letʼs run through quickly what would normally be the steps to purchase a tax lien in a self-directed IRA. First you must submit the investment to the IRA Trustee or Custodian. During business hours they will then review and hopefully approve the investment. Next you need the funds, but this poses a problem because most auctions require immediate payment, or at least a down payment with the balance due in 24 hours. The Custodian simply will not send the funds to “possibly” buy the lien. There are too many steps and expenses when you try to purchase a tax lien using a self-directed IRA because everything must be run through the Custodian; and this is assuming the Custodian will even allow you to do it in the first place. Also, what if an unexpected opportunity arises while you’re at the auction? You would have no way of taking advantage of the deal because the self-directed Custodian controls your retirement funds. You need immediate authority and checkbook control of your IRA.
Tax Liens in an IRA LLC
This is where the freedom and control a CheckBook IRA LLC gives you becomes crystal clear. Since you, as manager of the IRA LLC, are already “pre-approved” to act within certain guidelines, you can make an instant decision on whether the investment would be a good use of your retirement funds; no need to wait until business hours for an answer. Once you make the decision to invest, you can simply stop by your local bank and have a cashierʼs check issued from the LLC business checking account. In fact you could use cash, if properly documented. If you go to the auction but don’t end up buying anything, you can always return the cashier’s check and have the funds put back in the IRA LLC bank account.
When it comes time for the LLC to sell the lien, you can sign whatever documents are necessary for the sale. You also would have the authority to creatively structure the sale. For example, you could sell the entire lien, or even split up the interest and principle. And if the lien isnʼt paid and you take possession of the property, you’re in a perfect position with the IRA LLC to either flip the property or turn it into a rental.
So in short, the only answer to buying tax liens with IRA funds is the Check Book IRA LLC. You’ll have checkbook control of the funds; you’ll have the freedom to creatively structure a deal; you’ll have the authority to move on an investment and sign whatever is necessary. What you won’t have are pesky transaction fees, processing times, and the dread of knowing every part of a deal must be submitted to the Custodian for approval. Investing in tax liens is just one of many examples of why the freedom a CheckBook IRA LLC provides is so preferable to the many restrictions, headaches, and fees that are par for the course when investing with a self-directed IRA.
Invest intelligently. Enjoy the rewards.
I am looking at investing in tax liens with my IRA LLC.
Can my IRA pay for me to take a class to learn more about the process?
This is a tricky subject, because this subject can be argued several different ways; some affirming, others opposing. The general consensus though, is that it is best to steer clear of this sort of thing. There doesn’t seem to be anything wrong with an IRA LLC manager subscribing to a website or publication that deals directly with an investment activity the LLC is engaged in, but taking classes seems to be a different deal.
I can say definitively one way or the other, but if it were my account, I would refrain from using IRA funds to take the class.
Hope this helps.
We are partnering with an investor in a different state to buy tax liens. Soon we will have a checkbook IRA LLC.
1) Is it acceptable to write a check out of the checkbook IRA, deposit it in a joint account with him so he can get the needed cashier’s check for the purchase?
2) And if he buys multiple liens, is it advisable to use separate checks for each lien?
Thanks in advance Jordan!
It depends on the agreement between this investor and the IRA LLC. Dispensation of funds will depend upon what you two have agreed on, so if there’s an agreement in place that contemplates funds being placed in a joint account, that he can use to purchase the liens, then you can do just that.
Whether or not you should use separate checks for each lien depends again, on what you two have agreed to. It might be easier to separate things out, just for tracking and paperwork reasons.