I wanted to find out if anyone has done a property purchase using combined money from their self-directed IRA and funds outside their retirement as the down payment. I'm looking at combining both since commercial properties require a 25% down payment, but I know there are tax implications with how the business is set up so a portion of the profits goes back into the retirement account. I'm also planning to talk with a tax CPA and lawyer but wanted to hear from people who've done it already.
Thanks in advance!
I would recommend against what you are considering, as it would be likely to create a self-dealing, prohibited transaction.
IRS rules prohibit and direct or indirect benefit between a plan and a disqualified party.
In your situation as described, it would appear that the IRA and possibly you as well would be unable to purchase the property independently without access to the funds of the other party. A situation where access to your funds into a deal enables the IRA to participate in a deal it could not do otherwise would be a benefit.
@Clarence Bell You can utilize a partnership, with one partners self directed IRA investing in the LLC and one partner using 'regular' funds. It was complicated, and relatively expensive to set up and required the diligence of an IRA custodian and tax professionals. I wouldn't think it would be viable for a smaller deal (under 500K =/-?) but YMMV. Not a lawyer, tax accountant etc. and this is neither type of advice. But a few things to consider if you go this route:
1) what you said in your post almost certainly won't work if both sets of funds are yours. You are not allowed to self deal.
2) UBIT will add additional costs but this is often overplayed as a problem
3) You can structure an investment note to deal with #2 but this is an extra step most banks won't be familiar with or want to deal with. Think "investment bond with equity kicker" if you want to ask someone who can be more lucid about it.
4) Transparency, transparency transparency with the bank especially.
Hope this helps, it is possible.
You are considered to be a "Disqualified Person" to your IRA by the IRS. As such you must stay away as much as possible from any transactions your IRA is involved. This is called "arms length" transaction. Whenever IRA partners with disqualified person - you are asking for trouble. Such transaction would be either prohibited from the very beginning or very likely will lead to a prohibited transaction. The result is your IRA will be disqualified with penalties up to 100% of the account balance. Don't do it!
More on the prohibited transaction rules you can learn on the IRS website:
If debt financing will be utilized it is a no go. If debt will not be used then it can be done under a TIC or LLC, but specific rules apply so you will need to work with an attorney or CPA who can assist you in navigating these rules.
@Brian Eastman You're correct that I won't be able to fund the deal without using both funds. My retirement money has not been moved over into a self-directed IRA yet, so I'm open to other retirement options like the solo401k or 401(a) if they offer any flexibility.
@Jonathan R McLaughlin The partnership arrangement was more of what I was thinking where the property is purchased under the LLC but it still goes back to both of the funds coming from me, which seems to be the deal-breaker.
The self-dealing rules that would prohibit your intended transaction apply to all retirement plan formats. A self directed IRA or Solo 401(k) would only be appropriate if you come up with a different strategy where the plan can act on its own or in partnership with other parties outside of you and lineal family that are disqualified.
If eligible, a solo 401(k) plan will allow you to borrow 50% of the solo 401(k) balance not to exceed $50,000. You could then use these borrow funds for any purpose as they will no longer be considered 401(k) funds. To learn more about the 401(k) loan rules see the following.
@Dmitriy Fomichenko Thanks for the info in the link. That gave me a really good picture on who's disqualified from partnering with on a real estate transaction. Could I pool retirement accounts from different people together as long as they're not a disqualified person?
@George Blower The transaction would involve debt financing as I want to leverage as much money as I can on the deal. I was considering the use of borrowing from my 401k with my existing employer as part of the non-retirement since I can't move that money but was hoping it could be combined with the self-directed. It sounds like I might be able to move my old retirement account into a solo 401k and borrow from that, as long as there aren't restrictions on borrowing from two 401k accounts at the same time.
Yes Clarence, your IRA can partner with other investor's IRAs.
To qualify for a Solo 401k you must be self-employed or own a small business without any full time non-owner employees.
Yes you can borrow from the Solo 401(k) plan even if you also borrow from your daytime employer's 401(k) plan.
Reason being, you don't own the business that sponsors your day-time employer 401(k) plan so the 401k loan aggregate rules don't come into play.
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