Can an Arizona IRA LLC Own Land in Another State?

An Arizona limited liability company owned by your self-directed IRA can buy, hold, rent and sell real estate located in any of the 50 states. Nothing in Arizona law or federal tax law confines an Arizona LLC to Arizona dirt. But "can" is not the same as "should without help." The moment your IRA LLC buys land outside Arizona, a second state's law attaches to that land, and you will need a real estate lawyer licensed in that state to prepare and record the deed.

 

This article explains why an Arizona IRA LLC may own out-of-state real property, the real advantages of doing it, the costs and traps that come with it, and why the deed must be prepared by a lawyer admitted in the state where the land sits.

The Short Answer

An Arizona IRA LLC is simply an Arizona limited liability company whose sole member is a self-directed IRA. The LLC is a legal person. Like any other legal person, it may acquire and own real property wherever real property is sold. An Arizona LLC can own a duplex in Boise, a strip center in Dallas, farmland in Iowa, a condominium in Maui or a vacant lot in Tennessee.

 

The federal tax rules that govern IRAs do not limit where the IRA's investments may be located either. The Internal Revenue Code tells you what an IRA may not own — life insurance and most collectibles — and it tells you who the IRA may not deal with. It says nothing about geography.

Why an Arizona LLC May Own Land in Another State

Two well-settled legal principles make this work.

 

First, the internal affairs doctrine. Every state applies the law of the state of formation to a company's internal affairs — who the members are, how the company is managed, whether the members are shielded from company debts, how the company may be dissolved. Arizona codifies this rule for out-of-state companies operating here in A.R.S. §29-3901, which provides that the law of the jurisdiction of formation governs the internal affairs of a foreign limited liability company and the liability of its members and managers. Every other state has a mirror-image statute. Your Arizona IRA LLC therefore remains an Arizona LLC governed by the Arizona Limited Liability Company Act no matter which state's dirt it buys.

 

Second, the law of the situs governs the land. Real property has always been governed by the law of the place where it sits. Deed form, execution and witnessing requirements, recording rules, transfer taxes, foreclosure procedure, landlord-tenant law, mechanics' lien law, community property rights, homestead rights and property tax assessment are all determined by the state — and often the county — where the parcel is located. Arizona law has nothing to say about a deed to Ohio land.

Registering Your Arizona LLC in the Other State

Owning out-of-state land frequently obligates your Arizona LLC to register as a "foreign" LLC with the other state's secretary of state or corporation commission. Registration is not a change of the LLC's home state. It is permission to transact business in the second state, and it usually comes with a registered agent requirement, an annual or biennial report, and a filing fee.

 

Arizona's version of this requirement illustrates how the statutes read. A.R.S. §29-3902 says a foreign limited liability company may not do business in Arizona until it registers with the Arizona Corporation Commission. If it fails to register, it may not maintain an action or proceeding in Arizona courts — but the failure does not invalidate its contracts, does not prevent it from defending a lawsuit, and does not strip its members and managers of limited liability. Most states follow this same pattern, though a minority also impose back fees, interest and penalties as a condition of curing the failure.

 

Whether merely holding a single passive rental constitutes "doing business" varies by state and is a question for counsel in that state. Some states expressly exempt an entity whose only activity is owning real property collecting rent; many do not. The practical answer for most IRA LLC owners is to register, because the annual cost is small compared to the risk of being unable to file an eviction or a lien foreclosure when you need to.

The Advantages of Holding Out-of-State Real Estate in an Arizona IRA LLC

1. Checkbook control at the closing table

The central benefit of an IRA LLC is speed. Without an LLC, every earnest money check, inspection fee, closing cost and repair invoice must be requested from, approved by and paid by your IRA custodian, often with a several-day turnaround and a per-transaction fee. With an IRA LLC you, as the manager, sign the contract and wire the funds from the LLC's own bank account. In competitive out-of-state markets and at trustee sales, that difference decides whether you get the property.

 

2. One entity for properties in several states

A single Arizona IRA LLC can hold parcels in three or four states rather than requiring you to form a new LLC in each one. You maintain one operating agreement, one EIN, one bank account and one set of books. You will still register the LLC in each state where it owns property, but registration is far cheaper and simpler than organizing and maintaining separate entities.

 

3. Arizona LLC law is favorable and familiar

Arizona has no annual report requirement for LLCs and no annual franchise tax on LLCs, and the Arizona Limited Liability Company Act gives members and managers strong statutory liability protection. Compared with organizing your IRA LLC in the state where you happen to be buying — California's $800 minimum annual franchise tax being the standout example — keeping the entity Arizona-based is often the cheaper long-run choice.

 

4. A liability shield between the property and the rest of your IRA

If a tenant, a guest or a passerby is injured on the out-of-state property and sues, the claim runs against the LLC that owns the parcel. Properly formed, capitalized and operated, the LLC keeps that claim from reaching the balance of your IRA. Rental real estate is the single most litigation-prone asset most IRA owners will ever hold, and the shield matters most when the property is a thousand miles away and you cannot personally watch it.

 

5. Access to markets Arizona does not offer

Cash-flow yields, landlord-friendly eviction law, property tax rates, insurance cost and population trends vary enormously across the country. Confining a retirement account to one metropolitan area is a concentration risk. An IRA LLC lets your IRA buy where the numbers actually work.

 

6. Lower ongoing custodial fees

Many self-directed custodians price by the number and type of assets held. When the IRA owns one asset — the LLC membership interest — instead of six parcels in four states, the annual custodial bill usually drops, sometimes substantially.

 

7. Privacy at the county recorder

The recorded deed names the LLC, not you and not your IRA custodian. That is a modest but real benefit when you would rather not have your retirement holdings indexed by name in a public database that anyone can search.

The Disadvantages, Costs and Risks

1. A second set of professionals in a second state

You will need, at minimum, a real estate lawyer licensed in that state.

 

2. Foreign registration fees, agents and reports forever

Registration in the second state is not a one-time event. Most states require an annual or biennial report with a fee, a registered agent with a physical address in that state, and prompt updates when the LLC's information changes. Miss two reports and the state administratively revokes your registration, which can suspend your right to sue there.

 

3. State entity-level taxes and fees the IRA does not escape

An IRA is exempt from federal income tax, but some state charges are imposed on the entity for the privilege of doing business, not on income, and a tax-exempt owner does not eliminate them. California's $800 minimum franchise tax plus its gross-receipts-based LLC fee is the best-known example; Texas, Tennessee, Delaware and others have their own entity-level regimes. Confirm the second state's rules before you buy, not at tax time.

 

4. Nonresident withholding when you sell

Numerous states require the closing agent to withhold a percentage of the gross sale price when the seller is a nonresident entity, and then require a return to be filed to get it refunded. States with such regimes include California, Colorado, Georgia, Hawaii, Maryland, New Jersey, New York, Oregon, South Carolina, Vermont and West Virginia, among others. An IRA-owned LLC is frequently entitled to an exemption or a reduced rate, but only if the correct certificate or affidavit is filed before closing. This is exactly the kind of trap a local real estate lawyer catches and an out-of-state lawyer does not.

 

5. You cannot manage the property yourself in the way you are used to

Federal law prohibits you from personally providing services to an asset your IRA owns. You cannot fly out and paint the rental, replace the water heater, or perform the annual maintenance to save the IRA money. Distance makes this rule easier to obey in one sense and harder in another: you must hire and pay third parties, from IRA LLC funds, for everything.

 

6. Every expense must come from the IRA LLC, and every dollar must return to it

Property taxes, insurance, HOA dues, repairs, capital improvements and the second state's filing fees must all be paid from the LLC's bank account. If the LLC runs short and you advance your own money, you have committed a prohibited transaction. Out-of-state property is more likely to produce a surprise assessment or an emergency repair than a property you can drive past, so the account must be funded with a real reserve.

 

7. No depreciation, no deductions, no 1031, no step-up

Real estate held inside an IRA loses every tax advantage that makes real estate attractive outside an IRA. There is no depreciation deduction, no mortgage interest deduction, no deduction for property taxes or repairs, no capital gain rate, no Section 1031 exchange, and no step-up in basis at death. Gains come out as ordinary income when distributed from a traditional IRA. Losses cannot be deducted at all. If the property performs poorly, the IRA simply absorbs it.

 

8. Financing is harder and triggers a tax

The IRA LLC can borrow only on a nonrecourse basis, because you cannot personally guarantee the loan. Nonrecourse lenders for out-of-state IRA-owned property are a small market, they require larger down payments, and their rates are higher. Worse, borrowing produces unrelated debt-financed income tax, discussed below.

 

9. Distance amplifies every operational failure

A vacancy you cannot see, a property manager you cannot walk in on, a code violation notice mailed to an address you no longer monitor, a contractor's lien recorded without your knowledge — these are the ordinary hazards of remote real estate ownership, and they are more consequential inside an IRA, where you cannot simply write a personal check to fix the problem.

You Must Hire a Real Estate Lawyer Licensed Where the Land Is

This is the single most important operational point in this article. When your Arizona IRA LLC buys land in another state, the deed conveying that land to the LLC must be prepared and recorded by a real estate lawyer licensed in the state where the land is located.

 

Why your Arizona lawyer cannot prepare the deed

An Arizona attorney is licensed to practice law in Arizona. Preparing a deed conveying land in Missouri, drafting the transfer tax affidavit that accompanies it, and advising on how title should be taken under Missouri law is the practice of Missouri law. In many states, drafting a deed for compensation without a license in that state is the unauthorized practice of law — a criminal offense in some jurisdictions. Beyond the licensing problem, an Arizona lawyer's malpractice coverage may not extend to work performed on another state's real property, which leaves you with no recourse if the deed is defective.

 

KEYTLaw forms Arizona IRA LLCs and advises on Arizona law and federal IRA tax law. We do not prepare or record deeds to land located outside Arizona, and no honest Arizona firm will tell you otherwise.

 

What the local real estate lawyer actually does for you

• Selects the correct form of deed. States use different instruments and the differences are substantive. A general warranty deed, a special or limited warranty deed, a grant deed, a bargain and sale deed and a quitclaim deed carry very different title warranties. Choosing the wrong one can leave your IRA with no recourse against the seller.
• Drafts the legal description correctly. A deed with a defective legal description may convey nothing. Metes-and-bounds states, platted-subdivision states, and public-land-survey states each have their own conventions, and the county recorder in each county has its own tolerances.
• Satisfies execution formalities. Some states require one or two subscribing witnesses in addition to a notary. Some require the preparer's name and address on the face of the instrument. Some require the grantee's mailing address for the tax bill. Some require specific margin sizes, font sizes or a cover page, and the recorder will reject the document without them.
• Handles transfer taxes and exemption affidavits. Documentary stamp taxes, realty transfer fees, deed excise taxes and recording surcharges vary by state and frequently by county. Several states require a separate affidavit of property value or property transfer affidavit filed with or shortly after the deed, with penalties for late filing.
• Protects your property tax position. Transfers can trigger reassessment, loss of an agricultural or greenbelt classification, or loss of a homestead or senior exemption. In California, a change in ownership triggers reassessment under Proposition 13 principles. Local counsel knows which transfers are exempt and how to document the exemption.
• Records the deed and confirms it recorded. Recording is not automatic. Local counsel delivers the instrument to the right office, pays the right fees, confirms the recording data, and sends you the recorded copy for the IRA LLC's records — which your custodian will eventually want to see.
• Registers the LLC in that state and advises on ongoing local obligations. Foreign registration, registered agent, annual reports, local business or rental licenses, and lead paint or rental registration ordinances are all local questions.

How the Deed Must Name the Buyer

The grantee on the deed must be the LLC, exactly as the LLC's name appears in its Articles of Organization filed with the Arizona Corporation Commission — including "LLC" or "L.L.C." punctuated the same way. A deed to "Smith Investments" when the entity is "Smith Investments, LLC" creates a title defect that will surface when you try to sell.

 

The deed should name the LLC alone. It should not name you individually, it should not name your IRA, and it should not name your custodian, because the LLC — not the IRA — is the owner of the land. Your IRA owns the membership interest in the LLC; the LLC owns the real estate. Some custodians nevertheless ask that the vesting read a particular way. Confirm your custodian's preferred vesting language and give it to the local real estate lawyer in writing before the deed is drafted.

 

The purchase contract should also be signed in the LLC's name, by you as manager, and the earnest money should come from the LLC's bank account. A contract signed in your personal name and later "assigned" to the IRA LLC is an invitation to a prohibited transaction argument.

Prohibited Transactions Follow You Across State Lines

Internal Revenue Code §4975 prohibits an IRA from engaging in almost any transaction with a "disqualified person," and IRC §408(e)(2) provides that if the IRA owner engages in a prohibited transaction, the entire IRA ceases to be an IRA as of the first day of that year — the whole account is deemed distributed, taxed as ordinary income, and hit with a 10% additional tax if the owner is under 59½.

 

Disqualified persons under IRC §4975(e)(2) include the IRA owner, the owner's spouse, ancestors, lineal descendants and their spouses, fiduciaries, and entities the disqualified persons control. Distance does not soften any of this. The rules most often broken with out-of-state property are these:

• You or a family member may not stay in, vacation at, or use the property — not for one night, not at fair rental value, not in the off season.
• You may not perform work on the property yourself, including repairs, maintenance, landscaping or cleaning between tenants.
• You may not pay any expense of the property with personal funds, and the LLC may not pay any personal expense of yours.
• You may not personally guarantee a loan to the LLC or pledge personal assets as collateral.
• The LLC may not buy from, sell to, lease to or hire a disqualified person, including your own property management company.
• You may not take a fee, commission or salary for managing the LLC or the property.

UBTI and UDFI on Leveraged Out-of-State Property

An IRA is tax-exempt, but not unconditionally. IRC §511 through §514 impose tax on two categories of income an IRA can generate through real estate.

 

Unrelated business taxable income. Passive rent from real property is generally excluded from unrelated business taxable income under IRC §512(b)(3). But an IRA LLC that buys, rehabs and flips houses repeatedly, or that operates a short-term rental with hotel-like services, may be treated as conducting an IRC §513 trade or business, and its net income becomes taxable to the IRA at trust rates, which reach the top bracket very quickly.

 

Unrelated debt-financed income. Under IRC §514, if the IRA LLC borrows to buy the property, the portion of rental income and of gain on sale attributable to the average acquisition indebtedness is taxable to the IRA. The exception in §514(c)(9) that lets qualified pension plans and educational institutions escape this tax does not apply to IRAs. In plain terms: a leveraged out-of-state rental inside an IRA LLC generates a tax bill and a Form 990-T filing obligation, and the tax is paid from IRA funds.

 

Neither tax makes out-of-state real estate a bad idea. Both make it essential that you model the after-tax return before you buy, and that you engage an accountant who has actually prepared a Form 990-T.

Checklist Before You Buy Out-of-State Real Estate

1. Confirm your self-directed custodian permits an IRA-owned LLC and knows this LLC is the IRA's asset.
2. Retain a real estate lawyer licensed in the state where the land is located, before you sign a purchase contract.
3. Ask that lawyer whether owning and renting the property requires foreign registration of the Arizona LLC in that state, and register if it does.
4. Ask that lawyer about transfer taxes, transfer affidavits, reassessment on transfer, and nonresident withholding on a future sale.
5. Confirm the exact vesting language with your custodian and give it to local counsel in writing.
6. Open the LLC bank account and fund it with the purchase price plus closing costs plus a real reserve for taxes, insurance and repairs.
7. Sign the purchase contract in the LLC's name, as manager, and pay earnest money from the LLC account.
8. Buy landlord and liability insurance naming the LLC as the insured, written by an agent licensed in that state.
9. Hire an unrelated third-party property manager. Do not manage it yourself and do not use a company you or a family member owns.
10. Have local counsel record the deed and send you the recorded copy for the LLC's records and the custodian's file.
11. Calendar the second state's annual report, registered agent renewal, property tax due dates and insurance renewal.
12. If the LLC borrowed money or will operate a business-like rental, engage a CPA to evaluate Form 990-T filing obligations.

Frequently Asked Questions

Can my Arizona IRA LLC own real estate in more than one other state at the same time?

 

Yes. One Arizona LLC can hold parcels in several states. You will typically register it as a foreign LLC in each state where it owns property, and each state will have its own annual filing and registered agent requirement. Some investors prefer a separate LLC per property to compartmentalize liability; that is a cost-versus-protection judgment to make with counsel.

 

Do I have to form a new LLC in the state where I am buying?

 

No. Registering your existing Arizona LLC as a foreign LLC in that state is almost always cheaper and simpler than forming and maintaining a second entity, and it keeps all of your IRA's real estate under one operating agreement and one EIN.

 

Can my Arizona lawyer prepare the deed if I pay for the extra work?

 

No. Preparing a deed to land in another state is the practice of that state's law. Hire a real estate lawyer admitted in the state where the land is located. That lawyer's fee for a straightforward deed and recording is usually modest and is money extremely well spent.

 

Does my IRA custodian have to approve the purchase?

 

Once the IRA has funded the LLC, the manager directs the LLC's investments and the custodian does not approve individual purchases. The custodian does need to know what the LLC owns for annual fair market valuation reporting, so send it the recorded deed and a year-end valuation.

 

Can I use a property manager?

 

Yes, and you should. The manager must be an unrelated third party. It may not be you, your spouse, your parents, your children, or a company any of you own or control. Pay the manager from the LLC's bank account.

 

Can the IRA LLC get a mortgage on out-of-state property?

 

Only a nonrecourse loan, because you may not guarantee the debt. Expect a larger down payment and a higher rate than a conventional investor loan, and expect the leverage to generate unrelated debt-financed income tax under IRC §514 on the debt-financed portion of the rent and the eventual gain.

 

Can I stay at the property one weekend a year if I pay fair market rent to the LLC?

 

No. Paying rent does not cure it. Any personal use of an IRA-owned asset by a disqualified person is a prohibited transaction, and the consequence is disqualification of the entire IRA.

 

What happens if the out-of-state property needs a $12,000 roof and the LLC has $3,000?

 

You may not pay the difference personally. The LLC's options are to receive an additional contribution from the IRA (if the IRA has cash or you can make a permitted contribution or transfer), to borrow on a nonrecourse basis from an unrelated lender, to sell another asset, or to sell the property. This is why the LLC bank account needs a reserve from day one.

 

Do I file a state income tax return in the other state?

 

The IRA is tax-exempt, so income tax is usually not owed, but some states impose entity-level fees or require an information return regardless. And if the LLC has unrelated business taxable income or debt-financed income, both federal and possibly state filings are required. Ask a CPA familiar with the second state before the first tax year closes.

 

Can the IRA LLC buy raw land out of state and hold it?

 

Yes. Raw land is a common IRA LLC holding because it generates no unrelated business income and needs no property manager. Remember that it also generates no cash, while property taxes, weed abatement and registration fees still must be paid from the LLC account.

 

What happens to the property when I die?

 

The LLC membership interest is an IRA asset and passes under your IRA beneficiary designation, not under your will or trust and not through probate in the state where the land sits. That avoidance of ancillary probate in the second state is one of the quieter advantages of holding out-of-state real estate through an IRA LLC. Keep your beneficiary designation current with the custodian.

Hire Us to Form Your Arizona IRA LLC

This article is general information about Arizona law and federal tax law. It is not legal advice about your situation, and it is not advice about the law of any state other than Arizona. Real property law is state-specific. Before your IRA LLC buys real estate outside Arizona, hire a real estate lawyer licensed in the state where the land is located.

 

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