Residential Investor · Allentown, PA · Member since 2012 · 96 posts · 29 votes
SDIRA experts chime in: So I'm looking to make a loan on a performing rental property owned in an LLC. It already has a first mortgage (at around 20% LTV), so a lot of equity. 75% of the $$ would come from my SD Roth IRA, 25% from my personal funds. (if you are an SDIRA expert I know you are going to ask if I could make the loan without the IRA...and the answer is yes. But tax free is better). WHAT IS THE BEST WAY TO STRUCTURE THIS LOAN? Tag: self-directed IRA
I’m sorry, @Heath Ryans, but I wonder how in the world you got your transaction past your SDIRA custodian? Were you clear with them what you were doing?
Both you and @Eric E. are disqualified individuals with regard to investing with your SDIRA's. So is an LLC that you might own. The bottom-line rule is you cannot personally profit from an investment made with your retirement plan. These are prohibited transactions.
The two of you might want to read IRS Publication 590-A and look up Prohibited Transactions.
@Eric E. I am absolutely not an expert in the SDIRA field, however, I just did a similar deal. Funding was for renovations on a LLC owned apartment complex that already had a first position lien from a community bank. I did a 70/30 split between SDIRA and personal. I place a second position lien on the property for the SDIRA, and a third position lien for personal funds. Each having their own Promissory Notes/Deed of Trust. No clue if that's the best way or not, but it works and a paper trail exists for both loans.
I’m sorry, @Heath Ryans, but I wonder how in the world you got your transaction past your SDIRA custodian? Were you clear with them what you were doing?
Both you and @Eric E. are disqualified individuals with regard to investing with your SDIRA's. So is an LLC that you might own. The bottom-line rule is you cannot personally profit from an investment made with your retirement plan. These are prohibited transactions.
The two of you might want to read IRS Publication 590-A and look up Prohibited Transactions.
@Jeff S. the way I read the post @Eric E. was making a loan to an unrelated LLC. If he owns it, then yeah that won't work out. The loans I made were to an LLC that I have zero connection to.
Doing deals like this can be complex. I was in one at one time but we (disqualified partner and I) but we sold that one off.
I would suggest anyone doing this google videos by Matt Sorenson from KKOS Lawyers (he has the #1 selling book on self directed accounts) or Equity Trust also covers things well.
Essentially, to VERY liberally paraphrase the concept "you can 'co-invest' with a disqualified party (yourself or another one) ONLY on an original purchase or transaction. Meaning you could not start with say your IRA and THEN add some of your own funds. You can also never add more funds to that partnership in the future to my understanding.
After learning all of the complexities of doing these types of dealing by doing one when under-educated about it, I have since chosen to find partners that are NOT disqualified to me.
You only asked (and answered) first part of the question! The second part is: can your self-directed Roth IRA fund this loan on it's own, without your personal funds?
If the answer is yes - then you can pull your IRA funds with your personal funds and fund this loan jointly. But why??? You said "tax free is better" (and I agree with you!), so I suspect you don't have enough funds in your IRA, otherwise you would not even entertain the idea of pulling your personal funds into this deal. And THAT is the problem. By bringing your personal savings you are enabling your IRA engage in a transaction it otherwise not able to participate, this would be considered "prohibited" by the IRS.
If you wish to stay out of trouble follow advice of @Daniel Dietz: make sure each transaction your IRA is involved with is "arms length" (no "disqualified person" is involved in the transaction).
So to answer your question, the best way to structure this deal is to find someone else who can bring in remaining 25%, or pass this on and look for another deal your IRA can afford.