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Jeff

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To buy Tax Deeds, I will be needing checkbook control of my SDIRA.

My current custodian is Pensco.  They charge over $600 a year, and the fees go up as you place more money with them.  Plus they ding you every time you want to do something (like buy a lien, or a Deed, or loan some money).  Those fees add up...and any checks they send can often take 5-10 business days!  5 days can RUIN some business deals!

Pensco told me I could get checkbook control, but that I would have to do all the paperwork and setting up of the LLC, etc., that was necessary to get that control--they did not offer help or advice.

There are a couple of internet custodians that will provide the entire service of setting up the LLC, paperwork, and checkbook control.  The set up fees are significant (~$1200), but then the yearly fees are only around $200.  After that there is only the yearly fee--no fee for loaning money, no fee for buying a deed, no fee for making a loan.  Only what your bank charges you for your checking account (nothing?), checks ($20?), and any wire service fees ($30?). 

You want to buy a lien?  Write a check. 

You want to buy a Deed?  Write a check. 

You want to make a loan?  Write a check.

____________________________________________________________

Questions.  Am I understanding this correctly?  Is this possible?  Does it make sense for what I want to do?  Will I save money in fees (after the first year)? 

Can anyone recommend a custodian that offers this service?  

Any other advice?  Am I missing something?  Are there any risks that I don't know about?

 

 


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Kingside

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Reply with quote  #2 
One of the downsides of using an LLC in your IRA to get checkbook control is that if you are based in California, you are going to get hit with a minimum of $800 a year in franchise taxes plus compliance costs, and possible gross receipts taxes.

To get around this, some folks are using a business trust structure within their IRA instead of an LLC to get checkbook control. I think Midatlantic is a custodian that will permit this. With a business trust though you don't get the limited liability you would get with an LLC if that is a concern.

Personally, I have decided against the complication and extra costs of checkbook control for my SDIRA.  I find that for investing in trust deeds and real property with a full service property manager, it is not necessary for me.
Jeff

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Quote:
Originally Posted by Kingside
One of the downsides of using an LLC in your IRA to get checkbook control is that if you are based in California, you are going to get hit with a minimum of $800 a year in franchise taxes plus compliance costs, and possible gross receipts taxes.

To get around this, some folks are using a business trust structure within their IRA instead of an LLC to get checkbook control. I think Midatlantic is a custodian that will permit this. With a business trust though you don't get the limited liability you would get with an LLC if that is a concern.

Personally, I have decided against the complication and extra costs of checkbook control for my SDIRA.  I find that for investing in trust deeds and real property with a full service property manager, it is not necessary for me.

Thanks for your info!

 

I live here in SD, but I don't have any rentals in CA.  The tax deeds I am currently looking to buy are in Texas.

Can I start my LLC in Texas and avoid the CA fees?  Are there any downsides to having a Texas LLC?  Will I be able to buy liens and deeds in other states?


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Kingside

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I am not a tax expert, but my understanding is that California's Franchise Tax Board is very aggressive with foreign entities with a presence in California who fail to register with the Secretary of State (and pay the minimum franchise fees).

You might consider trying an investment or two in the Texas tax deeds outside your IRA first and see how it goes. If your experience is positive so that you want to start doing it through your IRA in volume, then you can consider incurring the setup and maintenance costs for a checkbook structure in your IRA with an appropriate custodian.
Jeff

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Quote:
Originally Posted by Kingside
I am not a tax expert, but my understanding is that California's Franchise Tax Board is very aggressive with foreign entities with a presence in California who fail to register with the Secretary of State (and pay the minimum franchise fees).

 

I live here but have no rentals in this state.  All of my rentals are out-of-state. 

Can they MAKE me pay for an LLC here just because I live here!?

Anyone else live in CA but own an LLC out-of-state?


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SFL

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Quote:
Originally Posted by Jeff

I live here but have no rentals in this state.  All of my rentals are out-of-state. 

Can they MAKE me pay for an LLC here just because I live here!?

Anyone else live in CA but own an LLC out-of-state?



Here is a blog post which is on-point:

https://www.corporatesecuritieslawblog.com/2014/07/is-your-out-of-state-llc-doing-business-in-california/

See also the following link from the California Franchise Tax Board:

https://www.ftb.ca.gov/forms/misc/3556.pdf

Example 1 on page 4 reads as follows:

"Paul is a California resident and a member of a Nevada LLC.  The Nevada LLC owns property in Nevada.  The LLC hires a Nevada management company to collect rents and provide maintenance.  Paul has the right to hire and fire the management company.  He occasionally has telephone discussions from California with the management company in Nevada regarding the property.  He is ultimately responsible for the property and oversees the management company.  Paul conducts business in California on behalf of the LLC.  The LLC must file Form 568."

Looks to me like if you are managing an out-of-state LLC and you are a California resident, then the California Franchise Tax Board takes the position that the LLC has a presence in California for tax purposes.

Are there ways around this?  For high-stakes matters, maybe yes and maybe no, but that would require the advice of a competent tax attorney and probably a fairly extensive work-around.  If you're really the boss and all the LLC's mail is arriving at your home in California, I doubt you would have a case.  I'm not a tax attorney, but my sense is that this is a situation where you would be best off paying up and filing the appropriate paperwork.  

If the business isn't good enough to support this expense, then it would probably make sense to look for other opportunities.



Jeff

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Quote:
Originally Posted by SFL


Here is a blog post which is on-point:

https://www.corporatesecuritieslawblog.com/2014/07/is-your-out-of-state-llc-doing-business-in-california/

See also the following link from the California Franchise Tax Board:

https://www.ftb.ca.gov/forms/misc/3556.pdf

Example 1 on page 4 reads as follows:

"Paul is a California resident and a member of a Nevada LLC.  The Nevada LLC owns property in Nevada.  The LLC hires a Nevada management company to collect rents and provide maintenance.  Paul has the right to hire and fire the management company.  He occasionally has telephone discussions from California with the management company in Nevada regarding the property.  He is ultimately responsible for the property and oversees the management company.  Paul conducts business in California on behalf of the LLC.  The LLC must file Form 568."

Looks to me like if you are managing an out-of-state LLC and you are a California resident, then the California Franchise Tax Board takes the position that the LLC has a presence in California for tax purposes.

Are there ways around this?  For high-stakes matters, maybe yes and maybe no, but that would require the advice of a competent tax attorney and probably a fairly extensive work-around.  If you're really the boss and all the LLC's mail is arriving at your home in California, I doubt you would have a case.  I'm not a tax attorney, but my sense is that this is a situation where you would be best off paying up and filing the appropriate paperwork.  

If the business isn't good enough to support this expense, then it would probably make sense to look for other opportunities.



 

Wow...thanks for the work you have done to educate me.  I will read this again and again until it sinks in.

Does it matter that the LLC is held in a Roth, which shouldn't have to pay taxes?

 

Surely someone else has an out-of-state LLC and lives in CA?  Anyone going to fess up?


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SFL

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Reply with quote  #8 
Quote:
Originally Posted by Jeff

Surely someone else has an out-of-state LLC and lives in CA?  Anyone going to fess up?



Of course lots of California residents have out-of-state LLCs.

Many (most?) small businesspeople are not aware of every obscure change in tax regulations and reporting requirements, and only react if and when they're contacted by the authorities.  

And they're only contacted by the authorities if the authorities have reason to contact them.  Perhaps something in their personal income tax returns raises a red flag; perhaps the authorities have obtained access to some other records - whether in-state or out-of-state - which raise a red flag; perhaps the authorities are the beneficiary of a tip from a disgruntled ex-spouse or ex-business partner.

And if they're contacted by the authorities, they can then decide what to do.  In the case the issue at hand, the blog I mentioned in an earlier post states the following: 

"The State can impose a penalty of $2,000 per taxable year if an out-of-state LLC is doing business in California and fails to file a tax return and pay the taxes and fees due. The penalty is due only if the FTB sends a written demand that a return be filed and the LLC does not file the return within 60 days."

If this information is accurate, then the unaware taxpayer has 60 days to pay what is owed without facing any penalties.  Of course, if the taxpayer knew the law and purposefully avoided paying taxes, this would not be good.  But the politicians who passed these laws realize that the vast majority of people are neither tax attorneys nor accountants and cannot possibly be expected to know the ins and outs of every obscure legal issue.  

Having the LLC in a Roth IRA poses some additional interesting twists.  As you point out, it raises some additional questions regarding whether the same rules that apply to individuals also apply to a Roth.  Additionally, depending on how the FTB determines who might be worth auditing, it could be that an LLC owned by a Roth IRA would not raise the same red flags as an LLC held by an individual.

I don't know the answer to these questions, and I don't have any advice to give on this.  You should check with your accountant or tax attorney.  If you and your tax professionals decide to proceed under the assumption that these filing requirements don't apply in your case, then it would be wise to at least be prepared to react quickly in case the authorities at some point determine otherwise, so as to be able to avoid any penalties. 

Frankly, this issue would rank relatively low on my list of concerns. 

I would be much more worried about failure to fully comply with every rule governing what you can and cannot do with retirement accounts.  Not only do you have to get this right if everything goes according to plan, but you also have to get this right if unforeseen circumstances require you to raise more money than you have available in the retirement account.  The penalties for a failure here can be draconian.  You have to get this right.

I would also be much more worried regarding the validity of your business plan in the first place.  There are lots of smart people in Texas.  Why should an out-of-state novice be able to snatch exceptionally attractive investment opportunities from experienced investors on their own home turf?  There needs to be a good answer to this question.

Every prize is not worth winning.  Crack houses, toxic waste dumps, real estate subject to additional liens which haven't been extinguished, real estate in neighborhoods which never will recover - there are lots of reasons why savvy investors in the know decide to let someone else "win" the auction.  

Residents of prosperous urban areas often make assumptions that they shouldn't be making, because they have never experienced areas where the price of existing housing can be a tiny fraction of replacement cost.  They would save a lot of money if they understood the economics of defunct one-company manufacturing towns, or defunct mining towns, or rural areas that have lost 90% of their population.  








taddyangle

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Reply with quote  #9 
I finally decided to meet with a tax adviser.  He reviewed 2017 taxes (not yet filed, just an extension) and flagged the LLC.  He said out of state LLC for a CA resident is a red flag and could be liable to pay the state the $800 fee.   



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Jeff

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Quote:
Originally Posted by taddyangle
I finally decided to meet with a tax adviser.  He reviewed 2017 taxes (not yet filed, just an extension) and flagged the LLC.  He said out of state LLC for a CA resident is a red flag and could be liable to pay the state the $800 fee.   


Yes...that is what I am finding too.

I am researching Business Trusts as suggested above (thanks Kingside).

There are claims that BTs avoid the CA Franchise Tax, as well as avoid the costs (minor) of having a "friend" in the state where your LLC is (basically so you can get mail there).  BTs also claim to avoid the costs of being a "foreign investor" or "foreign business" in states where you do business (outside the state where your LLC is)…

...AND, they avoid having to file a separate Tax Return!

 

Can anyone corroborate these claims?  If so, I am going to go with a BT.  Way cheaper.


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Paul

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Reply with quote  #11 
Maybe two years ago, I was looking into an IRA trust and the custodian I use for one of our IRA's had some information on IRA trusts. I like IRA Services, and their fees are very competitive.

https://www.iraservices.com/when-to-consider-ira-trust
Jeff

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Quote:
Originally Posted by Paul
Maybe two years ago, I was looking into an IRA trust and the custodian I use for one of our IRA's had some information on IRA trusts. I like IRA Services, and their fees are very competitive.

https://www.iraservices.com/when-to-consider-ira-trust

Thank you for your referral...

Yes, I saw that article on their website...I called them thinking it would be a one-stop shop offering Trusts and checkbook control.

They do not, currently, offer that service.  They ARE willing to administrate a Trust if you already have it set up (just like Pensco), but they won't help you set it up. 

Their fees are reasonable, but I would feel more confident if the same company that set up the Trust was also the custodian...I heard the forms need to be filled out "just so" and it matters who the administrator is...

I will probably go with a company that provides BOTH services, even if that costs a little more.

Unfortunately, there appears to be very few firms that offer both, and several of those are not answering their phones, or no longer work with a custodian (just the Trust formation), or no longer offer Trust formation (just the administration)...

Actually, I have found JUST ONE who seems to know what they are doing AND who answers their phone.

So far, anyway.

----------------------

Hi Jeff,

 

Thank you for your inquiry into a Self Directed IRA with Checkbook Control via Business Trust. I am including a summary of information on the IRA Business Trust and fees to get started.

 

IRA Business Trust (though Kingdom Trust)

  1. The IRA Business Trust gives the Client all of the benefits of an IRA LLC but without the yearly costs of the LLC. Unlike a Traditional LLC (which is what the IRA LLC is), there is no registered agent, no franchise taxes, and no yearly state fees. The only yearly fee is the annual maintenance fee with RLS to ensure compliance and to ensure there are no prohibited transactions occurring.
  2. Benefits of the IRA Business Trust
    1. Financial freedom. The ability to make nontraditional investments makes the IRA Business Trust a hit with investors. Instead of being restricted to the products offered by a particular financial institution, the Client has the ability to invest in what he/she understands. While there are certain items the Client cannot invest in, the degree of control and potential for diversity make this option appealing to investors.
    2. Time savings. When the Client does not have to wait for the approval of custodian, transactions are quicker and therefore easier.
    3. Asset protection. The IRA owns the Business Trust, but the Client manages it. These accounts are safer from lawsuits than investments made in the Client's own name.
    4. Anonymity. The Client does not need to place his/her name on any type of public record as the owner of an IRA Business Trust. Confidentiality remains intact. Keeping the Client's name off of public records helps protect the Client from both lawsuits and opportunistic identity thieves.
    5. Exemption from the Registered Agent requirements. Unlike an IRA LLC, a Registered Agent  is not needed for an IRA Business Trust. This means the Client does not have to pay the fees typically associated with hiring a Registered Agent.
    6. No federal tax returns required. IRA Business Trusts are "disregarded entities" for federal income tax purposes.
    7. Exemption from Franchise Taxes. The Franchise Tax that is regularly imposed on LLCs by states such as California does not apply to the IRA Business Trust. and the Franchise Tax is for LLCS, not Trusts.

 

Self Directed IRA Business Trust ($1200 to establish and $250 per year)

Fee includes the filing fees with the State, compositing of the Operating Agreement, negotiating compliance with the Custodian and comprehensively covers everything you will need to get your IRA Business Trust fully operational.

 

Please let me know if you have any additional questions. We would be happy to help you proceed.

 

Thanks,

 

Crystal Brooks

Royal Legal Solutions

 

 

 

 


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Jeff

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Reply with quote  #13 

BTW...I appreciate EVERYONE'S input on this thread.  I have gone from knowing pretty much nothing about the topic...to feeling somewhat confident about the risks and the right way to go in just a few days--largely from the interesting and intelligent advice on this board.

 

Smart guys here!  Thanks.


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Kingside

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Reply with quote  #14 
The Kingdom Trust info is a bit overly salesy in my opinion. The business trust is a revocable trust which means it has zero asset protection. A judgment against the trust in excess of the value of your IRA would likely flow through to you personally.

In terms of privacy, you would get that only if you name someone other than yourself as trustee. Most investments will have to be titled " _____, trustee of the __________ trust". Naming a third party as trustee kind of defeats the whole idea of checkbook control as it will be the trustee who has check writing ability, not you.

But if privacy and asset protection are not major issues for you, the business trust should be more cost-effective then LLCs for California residents.
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