The basic rule is this: An IRA can only be invested directly in a business if the owner of the IRA and his direct relatives own less than 50% of that business. But there’s a de facto exception for new ventures. At the point you are about to start a business, you don’t yet own any of it. So you can use IRA funds, in unlimited amounts, for the startup financing. This sounds like hairsplitting. But Ft. Worth, Tex. estate lawyer Noel Ice–who is no fan of this gimmick–says it works, based on the 1996 Swanson Tax Court case.The self-dealing rules create additional complications if you’re planning to work for your business, since you can’t set your own pay. Patrick Rice, a real estate broker who runs www.IRAresource.com, recently helped two couples use their IRA money to buy businesses–one a bed-and-breakfast, the other a convenience store. The couples each set up a limited liability company, owned 90% by the IRA , to acquire the property. An unrelated outsider bought the other 10% of the LLC and became its manager. That person then hired the couple to run the business and set their compensation–a key to making this kosher.
A similar structure may work if you want your IRA to own real estate used by your business. The IRA owns 90% of an LLCthat owns the property. The rent is set at the market rate by an outsider who has a 10% interest in, and management authority over, the LLC. (Watch out: If the LLCacquires the property partly with debt, or the bed-and-breakfast has profits, theIRA might have to pay unrelated business income tax.
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