Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
I have a potential partner and this is what we are thinking. Each of us roll traditional IRA's of the same amount of money (say $100K) into new SDIRA's. Each of us also set up new LLC's. My SDIRA lends his LLC $100K. His SDIRA lends my LLC $100K. The LLC's pay the SDIRA's 10% for the money. The LLC's invest in RE as each LLC owner sees fit.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
17y
As it was explained to me by a lawyer advising me about IRA investing, any investment that provides you a personal benefit is potentially troublesome.
For example, he recommended against purchasing a house near mine using IRA money.
Having your IRA loan money to someone is not a prohibited transaction.
Having someone else use their IRA to loan you money is also not a prohibited transaction.
But this "I'll scratch your back if you scratch mine" arrangement doesn't pass the sniff test. As far as I can tell, neither transaction is a problem. But the entire arrangement could be viewed as offering benefits to you personally (and the other guy.)
I think the law is fuzzy in this area. This could well be a situation where you could get away with it. But if dragged into tax court, you could end up having to fight with the IRS about this arrangement.
If this other guy is only willing to loan you money out of his IRA if you're willing to lend him money out of yours, it could be construed as using your IRA to secure a loan for yourself.
Keep in mind the penalty if the IRS were to rule against you is severe. The entire IRA would be considered immediately distributed and taxes and penalties would be immediately due on the entire account.
Real Estate Investor · Indianapolis, IN · Member since 2009 · 120 posts · 13 votes
17y
I don't believe you are breaking any rules. From the website www.ira123.com:
Self Directed IRA Business Funding
In today’s complicated economic environment, many people are opting to buy a business or franchise, or provide working capital to their existing small business. Utilizing a custom designed Business Funding IRA, you can finance a business, draw a salary, and contribute to your retirement plan with profits from the business.
As long as you are using your IRA money strictly for investments, be it a business, RE or stocks, I think you should be fine.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
17y
As it was explained to me by a lawyer advising me about IRA investing, any investment that provides you a personal benefit is potentially troublesome.
For example, he recommended against purchasing a house near mine using IRA money.
Having your IRA loan money to someone is not a prohibited transaction.
Having someone else use their IRA to loan you money is also not a prohibited transaction.
But this "I'll scratch your back if you scratch mine" arrangement doesn't pass the sniff test. As far as I can tell, neither transaction is a problem. But the entire arrangement could be viewed as offering benefits to you personally (and the other guy.)
I think the law is fuzzy in this area. This could well be a situation where you could get away with it. But if dragged into tax court, you could end up having to fight with the IRS about this arrangement.
If this other guy is only willing to loan you money out of his IRA if you're willing to lend him money out of yours, it could be construed as using your IRA to secure a loan for yourself.
Keep in mind the penalty if the IRS were to rule against you is severe. The entire IRA would be considered immediately distributed and taxes and penalties would be immediately due on the entire account.
Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
17y
Jon, you eloquently explained my concern. I wonder if one of the SDIRA trust companies would take a stand on this. My CPA needs to do more research, but I think he doesn't have much experience in SDIRA's.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
17y
You might discuss it with whoever you're considering for setting up your account. When I used Sterling Trust, they always wanted all the paperwork before they would fund a deal. Perhaps they were looking for something like this.
Investor · Chattanooga, TN · Member since 2009 · 1k+ posts · 903 votes
17y
I second what Jon said. Check with the custodian and see what they say. I'm not actually sure that you can just lend out 100k without it being secured by some type of asset. I'm actually doing the same thing with a buddy who rolled over an account and I'm using it like more of an equity line whereby I identify properties and his account lends on an individual basis.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
17y
IRS rules don't prohibit unsecured loans, but Sterling Trust Company does. The basic arrangement is fine. The only thing that might be dodgy is the back and forth part.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
17y
Jon, they will not. They can not provide legal advice which is what you would be asking.
Jon Holdman laid it out correctly, as each individual transaction on it's own merit does not violate any IRS guidelines and they each are not prohibited transaction. However, the back and forth arrangement "could" be viewed by the IRS as an attempt to circumvent their rules and thus be ruled a prohibited transaction resulting in the full distribution of your IRA and the 10% penalty.
That all said, I know several individuals with IRA's who have done and continue to do what you propose, and they have been successfull to date. I believe the "safer" way of structuring your deal is to have the amounts not be equal, make sure both funds loans to the individual and not to each other's IRA (of course), and make sure each loan is paid back (of course). Showing that each IRA made substantial profits from the transactions is a good thing.
Disclaimer: I am not an attorney and this info provided is not to be construed as legal advice, nor do I or my company endorse the transaction specified above. These are my personal opinions ONLY.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
17y
Also, the individuals I refered to earlier have a group of people they work with, creating more of an arms length transaction. In other words, you loan from your IRA to another, they loan to another and the other loans to you. Example scenario only.