Question: Two years ago my spouse and I caused our IRAs to make self-directed investments into an LLC that purchased a rental home. Each IRA is a 50% member of the LLC. The property needs repairs that will cost more money than the LLC has available. Can we cause our IRAs to make additional capital contributions to the LLC to fund the repairs?
Answer: No. If either IRA were to make an additional capital contribution to the LLC, it would create a prohibited transaction under Internal Revenue Code Section 4975(c), which provides that a:
“prohibited transaction” means any direct or indirect— . . . transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan”
Because the two IRAs each own 50% of the LLC, the LLC is a disqualified person under Section 4975(e)(2)(G). This provision says that a disqualified person is an entity 50% or more of which is owned by a fiduciary. Each IRA custodian is a fiduciary with respect to its IRA account and because the custodian owns 50% of the LLC, the LLC […]