My SD 401/IRA as a Client.

Tax, SDIRAs & Cost Segregation
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My SD 401/IRA as a Client.

Ralph S.
Real Estate Investor · Sacramento, CA · Member since 2008 · 566 posts · 356 votes

Ok, so you can, but you can't. I fully understand (no, I don't).
No, I don't want to vacation in the vacation home my SD IRA owns. Please don't point me to an IRS pub.

That you can't personally benefit from the profits of your SD IRA or SD 401(k) is a pretty clear statement, mentioned many times here in the forums, well, now forum. No skimming, syphoning, comingling. It alone makes (or loses) on the investments, I don't get any. Makes perfect sense and I can live with that. I'm not interested in milking it, want it to grow, so I ask.

Is there a separation between an SD IRA real estate investment and the business income I might derive by providing normal and customary business services to the SD IRA?

Or, would it just appear as an LLC shell game and an attempt to avoid detection?

Let's play What-If:
What if, I'm a broker or agent, disclosure issues aside, do I get a commission when my SD IRA buys and sells?
What if, I'm a contractor (licensed, insured, file a Schedule C, have employees, blah-blah-blah), can I competitively bid, and be awarded the contract to work on my SD IRA owned properties?
What if, I'm licensed and provide Property Management services, can I have a contract and charge a fee to manage my SDIRA owned investment properties?

What sayeth you SD wizards out there? My SD IRA, my client. Sure to get great service, but is it allowed?

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Clint CoonsBusiness Member
Real Estate Attorney · Tacoma, WA · Member since 2009 · 38 posts · 55 votes
16y

Ralph,

This isn't even a grey issue in the tax code. IRC 4975 defines a prohibited transaction as follows:

A “prohibited transaction†is defined in IRC §4975(c)(1) as any direct or indirect:
a. Sale or exchange, or leasing of any property between a plan and disqualified person;
b. Lending of money or other extension of credit between a plan and disqualified person;
c. Furnishing of goods, services, or facilities between a plan and disqualified person;
d. Transfer to, or use by, or for the benefit of, a disqualified person of the income or assets of a plan;
e. Act by a disqualified person who is a fiduciary, whereby he deals with the income or assets of a plan in his own interest or for his own account; or
f. Receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.

Unfortunately everything you would like to do with your IRA falls within the definition of a prohibited transaction. Also, using an entity that you own or control either directly or indirectly falls within 4975.

What would you like to do? Do you want to access some of your retirement funds without paying a 10% early withdraw penalty? Give me an idea of your endgame and maybe I can help but the way you mention is not the way to approach a self directed IRA.

[email protected]800-706-4741
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  • Clint CoonsBusiness Member
    Real Estate Attorney · Tacoma, WA · Member since 2009 · 38 posts · 55 votes
    16y

    Ralph,

    This isn't even a grey issue in the tax code. IRC 4975 defines a prohibited transaction as follows:

    A “prohibited transaction†is defined in IRC §4975(c)(1) as any direct or indirect:
    a. Sale or exchange, or leasing of any property between a plan and disqualified person;
    b. Lending of money or other extension of credit between a plan and disqualified person;
    c. Furnishing of goods, services, or facilities between a plan and disqualified person;
    d. Transfer to, or use by, or for the benefit of, a disqualified person of the income or assets of a plan;
    e. Act by a disqualified person who is a fiduciary, whereby he deals with the income or assets of a plan in his own interest or for his own account; or
    f. Receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.

    Unfortunately everything you would like to do with your IRA falls within the definition of a prohibited transaction. Also, using an entity that you own or control either directly or indirectly falls within 4975.

    What would you like to do? Do you want to access some of your retirement funds without paying a 10% early withdraw penalty? Give me an idea of your endgame and maybe I can help but the way you mention is not the way to approach a self directed IRA.

    [email protected]800-706-4741
    Anderson Advisors4.7630 Reviews
    WebsiteView Page
    3Reply
  • Christopher W.
    Residential Real Estate Agent · Orange County, CA · Member since 2009 · 289 posts · 95 votes
    16y

    As with anything with the tax code: if you have to ask 'what if', you already know the answer. The potential fines/fees are pretty onerous, even in the grey areas.

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    16y

    Like Clint says, there's nothing grey here. Your IRA CANNOT perform ANY transaction with you. A listing agreement between the IRA and you is a prohibited transaction. A contract from the IRA for you to do work for the IRA and get paid is a prohibited transaction. A contract from the IRA for you to manage their properties is a prohibited transaction.

    If you do work on an IRA property and do get paid, its a prohibited transaction. Do work and don't get paid and the value of the work is a contribution.

    The penalties are straightforward, too. The entire account is immediately distributed. You will owe taxes and penalties on the full amount of the account. So, $200K in an account that owns a $100K property. You take the listing and collect a $3000 commission, which you have to split with your broker. Say you're in the 28% bracket. The penalty is only $76,000.

    2Reply
  • Ralph S.
    OP
    Real Estate Investor · Sacramento, CA · Member since 2008 · 566 posts · 356 votes
    16y

    Thanks Clint

    But I clearly don't want to A(a), or A(b) although I hear you can borrow from an SD 401(k). A(c) "Services" seems a glitch. A(d) is a no, and A(e) could be a second glitch, perhaps. I'll just assume A(f) has a glitch in there somewhere, but it should be taken out and shot.

    I have a brokers license, but have spent a career in accounting & finance in large corps (still doing it), and for the last 12 years, owned and managed our own small collection of properties. I part timed as a broker associate for a few years. We sold most, too late, in '07/08, and I'm thinking it's about time to reverse that course. I've been considering several approaches for re-entry, with the brokers license and the ability to hang out my own shingle in the center.

    Brokers and PM's are already regulated as to the handling of client funds through trust accounts and making sure those funds are segregated and accounted for separately, so no desire to comingle or involve "his own account" with SD money in any way, and I have no questions about how to handle the bank/accounting aspects to support that.

    In my mind, (don't start), nothing I had hoped I might do, would infringe on an otherwise arms length transaction, or impact my SD account beyond the wisdom of my own investment choices. Think that is the spirit and intent of the regs. Current taxable income isn't the objective, more like cost avoidance or recapture would best describe it. After the bath I've taken in the IRA already, getting it back on a growth pattern with Real Estate was the plan. I've got six years before I can begin to distribute without penalty, so not a lot of time and I don't see it going anywhere where it sits.

    0Reply
  • Ralph S.
    OP
    Real Estate Investor · Sacramento, CA · Member since 2008 · 566 posts · 356 votes
    16y

    Christopher, it's true, if you have to ask, and I had a pretty good hunch, which is why I asked. Nothing wrong with riding right up against the line, you just have to be sure where the line is and have your ducks in a row.

    And thanks, Jon, always glad to hear your input, but there has to be clarity and definition and in most of the posts I've read on the subject, it involved how Joe Homeowner couldn't live off of it, or I'll loan to you, you loan to me. Most of the sites you visit tout buying real estate, then refer you to the IRS pubs. Nothing specific beyond a generic FAQ, never framed in a business/professional service scenario, and there are a number of custodian sites that talk about using SD IRA to start your own business. Glad I didn't ask about that one.

    It seems the freedom of Self Direction comes with some shackles, but there has to be some way to unlock the potential within the regs.

    Thanks.

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