Family Members Using IRA for My Syndicate
Hello BP,
I am raising money for a multi-family deal and I am wanting to get some close family members involved such as my grandfather and dad. The syndication will more than likely consist of 10 investors. I have heard that as long as the family member does not own more 50% of the LLC they can invest using an IRA and not break any rules.
Can someone please provide some more information on this topic that has some real experience?
Best Regards,
Kody
Hello @Kody Broussard, I AM NOT A CPA OR ATTORNEY. Is your IRA involves as well? That is, is it just IRA funds involved or is it you personally or your business partnering with family member's IRA?
We need a CPA with IRA knowledge to step in here but they are going to need a lot more detail here. There can be issues with a tax free or tax deferred IRA owning a business. But they can easily be a lender.
Also, families and IRAs mix very well, but only laterally. I can lend to my brothers and sisters and borrow from them but not up to my parents and not down to my children. You are going to need an answer from your IRA custodian or theirs, but if your IRA is not involved and only their's are, I suspect this will be considered a prohibited transaction.
- So, is your IRA involved?
- Will the LLC own the multifamily unit?
- So, 10 investors. Will the 10 fund the entire deal or is their financing involved? IRAs cannot personally sign for any borrowing; it must be full recourse loans only.
- 10 investors. Will some family be using their own funds while others use IRA funds? Will any investors want to use both types of funds (I have 80K in my IRA and 20K in my brokerage account)?
- Talk about ownership of the LLC. Who will own what percentage? Do they have signing authority or voting rights?
- Are any investors doing any actual work on the project/in the business?
Gerald Demers
Hello Gerald,
I figured this would happen by not providing enough detail haha. Thank you for the detailed response.
1) No, my IRA will not be involved.
2) Yes I will establish an offering LLC that will own the multifamily unit. I will have a percentage of equity in the LLC also.
3) This is good to know, I was not aware that an IRA cannot personally sign for borrowing. I guess they could take a loan out of their IRA. Do you know of another self directed form that can sign for borrowing?
4) Yes, it would more than likely be mixed funds.
5) I will own 25% and the remaining 75% will be owned by the 10 investors. The remaining 75% will be divided up based on the amount invested. They will be passive, I will manage the LLC.
6) No they will be passive, I will be handling all the work.
Best Regards,
Kody
The issue is whether the LLC the family members are investing into with will be viewed as a disqualified party to their IRA's, or if there is direct or indirect benefit between the IRA and a disqualified party.
Chief among disqualified parties to an IRA are lineal family, parents, grandparents, children & grandchildren - or an entity like a business or trust controlled by family.
Since you describe this as "your" LLC and you are putting together the entity and likely receiving compensation, then this LLC would most likely be viewed as disqualified to their IRA accounts. If not a roadblock at the LLC layer, there is likely a direct or indirect benefit to you of their investing in the entity, which would also be a roadblock.
This is what i figured would be the issue, but I wasn't 100% sure. The syndication offering LLC will be constructed to acquire the property. The offering LLC will consist of 10 investors, a potential few of them family members, and my self. Then I will manage this LLC with my management LLC.
I am assuming at retirement age they can pull the money out of the IRA and invest correct?
@Kody Broussard, if they take funds out of their IRA through a distribution and invest in your business, at that point, it is just cash from them and their IRA is not involved in the transaction and thus, neither you nor they are subject to any of the usual IRA restrictions.
Gerald
@Kody Broussard, I have done several syndications and raised millions with investors using a SDIRA as it is a great wealth building tool.
You need to be careful on which family members invest as they will be deemed a disqualified person and a Prohibitive Transaction as provided by the IRS.
My good friend @Carl Fischer at CAMA Plan can provide you more info and is a great resource.
In the meantime here is a schedule on who is deemed a Disqualified Person.
Good luck on your deal!!
@Brian Adams Great chart Brian. Helpful resource.
If you want to talk with an IRA company that does this all the time, Google Quest IRA. They are a self directed IRA company with a lot of there members involved in real estate as lenders and investors.
Thank you Richard for the lead on a good company to handle my IRA needs. I will check them out.
Best Regards,
Kody