Self-Directed IRA LLC FAQs | Checkbook Control IRA Rules

A checkbook control IRA is a self-directed IRA that invests substantially all of its money in a limited liability company the IRA owns, with the IRA owner serving as the unpaid manager of that LLC. The manager signs the contracts, writes the checks and closes the deals without waiting on the custodian. The structure is legal. What destroys accounts is not the structure — it is how people operate it.

 

These are the questions Arizona IRA LLC attorney Richard Keyt and his son, attorney and former CPA Richard C. Keyt, are asked most often about self-directed IRA LLCs. Read the answers about disqualified persons and loan guarantees twice. Those two topics account for most of the ruined accounts.

The Five Cases That Decide Most of This

Five decisions do most of the work in this area. Read them and you will see the pattern: the courts have never had a problem with the structure, only with what owners did once they had the checkbook.

The Structure and Whether It Is Legal

1. Is a checkbook control IRA LLC legal?

Yes. An IRA may own 100% of a newly formed LLC, and the IRA owner may serve as manager. Swanson v. Commissioner (1996) held that an IRA's funding and ownership of a newly formed entity, with the IRA owner serving as an officer, was not a prohibited transaction, and IRS Field Service Advice 200128011 conceded the point. Ellis v. Commissioner applied Swanson to a 98%-owned LLC. Every case since has attacked what the owner did after formation, not the structure itself. What is legal is the structure. What destroys accounts is how the structure is operated.

2. Does the custodian own my IRA LLC?

No. Your IRA owns it. The custodian holds title to the IRA's membership interest in a fiduciary capacity and is named on the LLC records as custodian for the benefit of your IRA. The custodian is a service provider, not an owner.

3. Can I be the manager of the LLC my IRA owns?

Yes, and that is the entire point of the structure. But being manager makes you a fiduciary under IRC §4975(e)(3) and therefore a disqualified person with respect to every asset the LLC holds. You get the checkbook and, with it, the duty to keep every dollar of value flowing to the IRA and none of it to yourself.

4. Can I be paid for managing it?

No. Not a salary, not a management fee, not a per-transaction fee, not a commission, not an expense stipend, and not compensation for your time. Serving as an unpaid manager is permitted; taking an economic benefit is the mistake that destroyed the IRA in Ellis v. Commissioner. IRC §4975(f)(6) closes the other door by removing the services exemption for IRA participants.

5. Can I reimburse myself for expenses I paid personally?

Reimbursement is where accounts die. IRC §4975(d)(10) does allow reimbursement of expenses properly and actually incurred in performing plan duties, but §4975(f)(6) removes that exemption for IRA participants as to compensation for personal services, and paying an LLC expense personally is itself an extension of credit under §4975(c)(1)(B) from the moment you write the check. The correct answer is never to pay an LLC expense personally in the first place. Keep enough cash in the LLC account that you are never tempted.

Disqualified Persons and Prohibited Transactions

6. What is a disqualified person?

The nine categories listed in IRC §4975(e)(2). For a typical IRA LLC the ones that matter are you (as fiduciary), your spouse, your ancestors, your lineal descendants and their spouses, anyone providing services to the plan, and any entity 50% or more owned by any of them.

7. Is my brother a disqualified person? Is my sister?

Not by family status. IRC §4975(e)(6) defines family as spouse, ancestors, lineal descendants and spouses of lineal descendants, and it overrides the broader IRC §267(c)(4) definition that would include siblings. So a loan to or from a sibling is not prohibited on its face. But a sibling can become disqualified on another ground — as a service provider, or as a co-owner of an entity — and a transaction structured to benefit you through a sibling can still violate §4975(c)(1)(D) or (E).

8. Is my son-in-law a disqualified person?

Yes. He is the spouse of a lineal descendant.

9. Is my father-in-law a disqualified person?

Not by family status. He is the ancestor of your spouse, not your ancestor. This is a narrow and easily misread distinction — get advice before relying on it.

10. Can my IRA LLC lend money to my daughter?

No. A lineal descendant is a disqualified person, and a loan from the plan to a disqualified person is prohibited under IRC §4975(c)(1)(B). Market interest, full security and a signed note do not cure it. Any family lending you can lawfully do should still be documented, secured and priced exactly as it would be for a stranger.

11. Can my IRA LLC buy a house I already own?

No. That is a sale or exchange between the plan and a disqualified person under IRC §4975(c)(1)(A). Price and fairness are irrelevant — an appraisal proving you sold it to your IRA at a bargain makes no difference to the analysis.

12. Can my IRA LLC buy a rental from my brother?

Generally yes, provided it is a genuine arm's-length purchase and your brother is not disqualified on some other ground. Document it as you would a purchase from a stranger: listed price or independent appraisal, escrow, title insurance, and no side agreements.

13. Can my child rent the IRA-owned house?

No. A lineal descendant is a disqualified person, and leasing plan property to a disqualified person is prohibited under IRC §4975(c)(1)(A) regardless of the rent charged.

14. Can I stay one night in the IRA's vacation rental?

No. Personal use of plan property is a use of plan assets by or for the benefit of a disqualified person under IRC §4975(c)(1)(D). There is no de minimis exception, and paying full nightly rate does not fix it.

15. Can I do the rehab or repairs myself to save the IRA money?

No. Furnishing services to the plan violates IRC §4975(c)(1)(C) whether or not you are paid, and the value of the labor you donate is also an unreported contribution that moves value into a tax-advantaged account outside the contribution limits. Hire unrelated contractors and pay them from the LLC account.

16. Can I hire my son the contractor if he charges below market?

No. Your son is a disqualified person and the discount makes it worse, not better — but a market-rate contract with him would be equally prohibited. The prohibition is on the transaction, not on the price.

17. Can my IRA LLC lend money to my business?

No, if you own 50% or more of the business — it is then a disqualified person under IRC §4975(e)(2)(G). And even under 50%, Rollins v. Commissioner, T.C. Memo. 2004-260, shows the loan can still violate §4975(c)(1)(D) and (E) because you decided, as fiduciary, to send plan money to a company you benefit from.

18. Can I invest my personal money alongside the IRA in the same deal?

This is the Kellerman fact pattern and it is very dangerous. Even where it is not prohibited per se, it puts you on both sides of every subsequent decision under IRC §4975(c)(1)(E) — every capital call, every sale, every allocation of expense. Do not do it without written advice specific to your facts.

19. Can my IRA LLC and my spouse's IRA LLC invest together?

Your spouse is a disqualified person as to your IRA, and each of you is a fiduciary of your own account. Joint investments between spouses' IRAs are a recognized risk area that requires careful analysis; neither the Department of Labor nor the courts have blessed them categorically.

Borrowing, Guarantees and Adding Money

20. Can the IRA LLC borrow money?

Yes, but only on a true non-recourse basis from an unrelated lender, and the debt will generate unrelated debt-financed income under IRC §514. Non-recourse means the lender's only remedy is the property. No personal liability, no carve-out guaranty, no side letter.

21. Can I personally guarantee the loan?

No. That is the single most common way IRA LLCs are destroyed. Peek v. Commissioner, 140 T.C. 216 (2013), and Thiessen v. Commissioner, 146 T.C. 100 (2016), both hold that a guarantee is an indirect extension of credit between the plan and a disqualified person under IRC §4975(c)(1)(B). In both cases the guarantee was never called, the loans were repaid, and the accounts were destroyed anyway.

22. What if the lender demands a guarantee?

Find a different lender. Non-recourse lenders who understand IRA-owned borrowers exist; they typically require larger down payments and charge more. That cost is the price of keeping the account, and it is far cheaper than the tax bill on a deemed distribution of the whole IRA.

23. Can I lend my own money to the IRA LLC if the deal is short on cash?

No. That is a loan between a disqualified person and the plan, prohibited under IRC §4975(c)(1)(B). Additional cash comes from the IRA through the custodian as a capital contribution — subject to the annual contribution limits if it is new money.

24. Can I add more money to the LLC later?

Yes, but only through the IRA. The money goes to the custodian first and then from the IRA to the LLC as a capital contribution. The sources are an annual IRA contribution, a transfer or rollover from another retirement account, or admitting another member IRA. A personal check written directly to the LLC is a prohibited transaction and an unreported contribution at the same time.

Taxes: UBIT, UDFI and Required Filings

25. Does the LLC need its own EIN?

Yes. The LLC gets its own EIN. Do not use your Social Security number and do not use the custodian's number.

26. Does the LLC file a tax return?

A single-member LLC owned by one IRA is generally disregarded for federal income tax purposes and typically files no income tax return of its own. A multi-member IRA LLC files Form 1065 and issues K-1s to the member IRAs. The reporting that always matters is the custodian's Form 5498, plus Form 990-T if the IRA has $1,000 or more of gross unrelated business income. State filing requirements vary.

27. Who signs the Form 990-T?

The trustee or custodian is the filer. As a practical matter most self-directed custodians require you to have the return prepared and then sign it in their capacity as trustee. Confirm your custodian's process before April, not during it.

28. When is the Form 990-T due?

For a calendar-year IRA, the 15th day of the fourth month after year end — April 15. Extensions go on Form 8868.

29. Who pays the UBIT?

The IRA pays it, from IRA or LLC funds. Paying it personally is a prohibited transaction and an unreported contribution.

30. What rate does my IRA pay on UBTI?

Trust rates under IRC §1(e), after a $1,000 specific deduction. Trust brackets compress fast — for 2026 the top 37% bracket begins at $16,000 of taxable income.

31. Does buying rental real estate for cash create UBTI?

Generally no. Rents from real property are excluded under IRC §512(b)(3) and gains on sale are excluded under §512(b)(5), provided there is no acquisition indebtedness and the property is not inventory.

32. Does flipping houses create UBTI?

Yes, if the volume and pattern make the LLC a dealer. IRC §512(b)(5) excludes gains from property sales but expressly not from stock in trade or inventory property. Flipping is one of the most common and least anticipated UBTI traps in a checkbook IRA — the investor who buys, rehabs and sells four houses a year is running a business inside a retirement account and owes tax on it.

33. Can I avoid UDFI by using a solo 401(k) instead?

For leveraged real estate, yes — and this is a real structural advantage, not a technicality. IRC §514(c)(9) exempts a qualified trust under section 401 from debt-financed income treatment on real property, and an IRA is a section 408 trust, not a section 401 trust. A solo 401(k) also allows much larger annual contributions and participant loans. It requires self-employment income and no non-spouse employees. If you qualify, compare the two before you form an IRA LLC.

Formation, Custodians and Annual Compliance

34. Can the IRA LLC pay my attorney's fees for forming it?

The IRA or the LLC can pay the cost of forming the LLC as an expense of the investment, and most custodians handle this routinely. What you must not do is pay personally and take reimbursement.

35. Should the LLC be an Arizona LLC?

Usually yes for an Arizona resident. Arizona has no annual report requirement and no annual fee, and the Arizona Limited Liability Company Act in A.R.S. Title 29, Chapter 7 gives the operating agreement broad authority. If the LLC will own real estate in another state, expect to register there as a foreign LLC as well — or, if Arizona has nothing to do with the deal, simply form the LLC in the state where the property sits.

36. What does it cost to maintain?

Arizona itself costs essentially nothing — no annual report and no annual fee. The real ongoing costs are the custodian's annual account and asset-holding fees, a statutory agent fee, an annual valuation of the LLC interest, and accounting if the IRA has UBTI or the LLC has more than one member. Budget for the valuation. It comes due every year whether or not the asset changed hands.

37. How is the LLC valued each year?

At fair market value as of December 31, with support your custodian will accept. For real estate that generally means an appraisal or broker price opinion; for an operating business, a valuation report. The custodian reports the number in box 5 of Form 5498 and, for the LLC interest itself, in boxes 15a and 15b.

38. What code appears on my Form 5498?

Code C — ownership interest in a limited liability company or similar entity. If the IRA also directly holds real estate or notes, additional codes or Code H may apply.

39. Does the IRS know I have an IRA LLC?

Yes, every year, from Form 5498. Assume the structure is visible and operate accordingly.

40. Can my IRA LLC hold gold coins in my safe?

No. IRC §408(m)(3) requires a bank or approved non-bank trustee to hold eligible coins and bullion. In McNulty v. Commissioner (2021) the taxpayer had her IRA LLC buy American Eagle coins and kept them in a safe at home; the Tax Court taxed the full value as a distribution and added penalties. Use an approved depository.

What Happens If You Get It Wrong

41. What is the penalty for a prohibited transaction?

For the IRA owner, the account ceases to be an IRA as of January 1 of the year of the violation, and its entire fair market value on that date is treated as distributed to you. Add ordinary income tax on that amount, the 10% additional tax under IRC §72(t) if you are under 59½, and potential 20% accuracy-related penalties under IRC §6662. Other disqualified persons pay 15% and, if the transaction is not corrected, 100% excise taxes reported on Form 5330.

42. Is only the offending investment disqualified?

No. IRC §408(e)(2) disqualifies the entire account, not the transaction. A $9,000 mistake in a $900,000 IRA distributes the $900,000.

43. Can I fix it if I discover a violation?

There is no self-correction program for IRA prohibited transactions. Unwinding the transaction does not restore the account's status. If you think a violation has occurred, get specialized tax counsel immediately — the analysis of whether the transaction was in fact prohibited, and of which years are still open, is where the remaining value lies.

44. How long can the IRS come after me?

Three years ordinarily. Six years under IRC §6501(e)(1)(A) if the deemed distribution exceeds 25% of the gross income reported on the return, which it almost always does. Thiessen is directly on point, and the court held it did not matter that the taxpayers did not know the guarantee was prohibited.

45. Does an IRA LLC give me asset protection?

The LLC provides ordinary charging order protection under A.R.S. §29-3503 for claims against the member, and limited liability for claims arising from the LLC's activities. What it does not do is protect an account that has been disqualified: in Kellerman the bankruptcy court held the disqualified IRA was no longer retirement funds and lost its exemption. The prohibited transaction cost the debtor the tax benefit and the creditor protection at the same time.

Ownership, Roth IRAs, Death and Whether to Do This

46. Can two IRAs own one LLC?

Yes, multi-member IRA LLCs exist, and the IRAs own membership interests in proportion to what each contributed. But every additional member changes the analysis — the plan asset percentage, whether any member is disqualified as to another, the 50% ownership test, and whether the arrangement itself was pre-planned in the way DOL Advisory Opinion 2006-01A condemned. A spouse's IRA or a parent's IRA can be a co-member, but the drafting has to account for the relationship. Multi-member IRA LLCs need custom advice, not a template.

47. Can a Roth IRA own the LLC?

Yes, and for a long-hold appreciating asset a Roth is often the better owner: qualified distributions are tax-free and the original owner has no lifetime required minimum distributions, which removes the illiquidity problem you get when an IRA holding a rental house has to distribute cash it does not have. The tradeoff is the tax due on the conversion up front. The prohibited transaction rules are identical either way.

48. What happens to the IRA LLC when I die?

The IRA passes under its beneficiary designation, and the beneficiary inherits an IRA holding an LLC interest — along with the distribution rules that apply to inherited IRAs and the same §4975 restrictions that applied to you. The operating agreement should say who manages the company in the interim. This is where an IRA LLC and your estate plan have to be coordinated, and where families most often discover that they were not.

49. Should I do this at all?

An IRA LLC makes sense when you have a genuine reason to hold non-traded assets in a retirement account, the discipline to run the company at arm's length from yourself, and enough account value to justify the formation cost, the annual valuations and the accounting. It makes no sense at all if the appeal is that it will let you do something with your retirement money that the custodian would not have allowed. That is exactly the impulse §4975 exists to punish.

This page is general information about federal tax and Arizona law, not legal or tax advice, and reading it does not create an attorney-client relationship. Prohibited transaction analysis is fact-specific. Get advice on your own facts before you act. Copyright 2026 KEYTLaw, LLC. All rights reserved.