NUTS & BOLTS RETIREMENT & REAL ESTATE
CHECKBOOK IRA
3 Devastating Checkbook IRAMistakes CASE STUDY: A MISUSED CHECKBOOK IRA PAINFULLY DERAILS INVESTOR’S RETIREMENT.
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by John Hyre
deductions on your business and per- sonal taxes will not necessarily destroy your IRA, it’s a good way to get the IRS’s attention so they can find the bad deci- sions you made that will destroy it. Our investor claimed unusually high, round numbers for travel and home-office ex- penses, common red flags to the IRS. CHECKBOOK LLC WAS SET UP PROPERLY OR THAT HE WAS USING IT CORRECTLY Our investor said in Tax Court that the checkbook-LLC “promoter,” who sold him the checkbook LLC at an event and later set things up for him, told him only that he could use the structure to write checks out 3 THE BIG ONE: HE DID NOT CONFIRM THAT HIS
hen a Phoenix engineer started flipping real estate after the 2008 housing crash, his first few flips netted him about $126,000. Things were off to a great start. However, due to a serious mistake the engineer made when he set up his flipping business using a Check- book LLC, he ended up on the hook for truly obscene taxes that could – and should – have been completely avoided. Here’s a brief summary of the three big things that went wrong: 1 HE HAD TOO MANY THINGS GOING ON IN HIS BUSINESS STRUCTURE Tax Court called the investor’s three business entities a “tangle.” He used the businesses somewhat in- terchangeably to do flips, buy and hold mineral W
CHECKBOOK LLC: Checkbook LLCs allow “checkbook control,” which means if an IRA owns a checkbook LLC, the owner of that IRA has complete signing authority over the retirement funds in the retirement account. This is important if you use investing strategies like flipping or buying at auction that require you to make fast or immediate payments. When a self-directed IRA does something prohibited by the IRS. Examples include investing with someone who is related to you or borrowing money from the retirement account and purchasing ineligible investments such as life insurance. PROHIBITED TRANSACTION:
Real estate investor for more than 35 years, licensed Realtor ® in Texas, and founder of Towards Wealth. MEET JIM GLASGOW
rights, and transfer properties among the businesses. One of those businesses the investor owned wholly by himself. This last was a big part of why he ended up under IRS scrutiny and eventu- ally lost his case and his retirement account.
of his tax-advan- taged IRA funds. Unfortunately, the business en- tities were set up incorrectly and the investor did not understand how to use them anyway. He commit-
IRA, make sure that they are set up cor- rectly and that you use them correctly. Tax Court does not care if you meant to commit a prohibited transaction or not. They’ll fine you either way. •
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ted multiple prohib- ited transactions, which ultimately terminated his entire
2 HE CLAIMED TRAVEL AND HOME-OFFICE EXPENSES THAT ALERTED THE IRS TO A POTENTIAL PROBLEM While claiming the wrong types of
$230,000 self-directed IRA.
JohnHyre is an attorney, accountant, and real estate investor based in Columbus, Ohio. Hemay be reached at johnhyre@ realestatetaxlaw.com. Viewmore details on
TAKEAWAY LESSON: If you are going to use complicated business structures in your self-directed
this case and others at www.iralawyer.com.
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