As I’ve discussed in the past, a self-directed IRA gives its owner the ability to invest in real estate, among other things.
To be brief, the IRS allows you to put some or all of the funds in your IRA into real estate, so long as you don’t benefit directly.
To ensure this, the IRS requires you to put that IRA in the trust of a custodian. (There are companies who specialize in this such as Entrust and Nexus Direct IRA.)
This could be expensive when it comes to real estate; especially if the custodian charges fees to write the checks for monthly expenses like water and trash, snow removal, etc.
However, there is a simpler, more cost-effective way to structure your IRA, which also gives you more control over your duplex.
A checkbook IRA, also called a self-directed IRA LLC, is created when you set up or roll-over your existing IRA into a self-directed account. Then you create an LLC to be owned by the IRA. You tell your IRA custodian to invest in the LLC, which you then manage yourself.
There are restrictions. Anything you earn must go directly back into the IRA. You can’t compensate yourself or use the duplex as your own primary residence or vacation home. You also can’t do business with any family members.
However, you can sell a duplex and buy another one, buy multiple properties, raw land, and even pool your money with other investors. Any money you use to buy, repair or maintain the duplex must come from your IRA, not you personally.
Of course, there are fees to initially set up the LLC, but ultimately, these should total a lot less than paying a custodian to write out checks every month on your behalf.