SDIRA Prohibited Transactions and Self Dealing

[Eric Clance]

I'm interested in opinions regarding the tax laws of SDIRA's.

I'm considering loaning my fiancé $100k from my SDIRA so she can pay off the current short-term loan she used to purchase an investment property. This loan would be an 18-month, interest only, with ballon payment, promissory note secured by deed of trust on this investment property. 

Because we are engaged but don't plan to actually get married, therefore not disqualified, I want to help her as much as possible with the property and finances. Will any of the below items I plan on doing be considered self-dealing or prohibited transactions?

1. Provide myself as "unpaid" labor for the renovation process.

2. Manage the purchase of materials for the renovation.

3. Upon renovation completion, give her my furniture to furnish the property as a short-term rental.

4. Help to clean the property between guests.

5. Spend nights together at the property.

6. I also plan to insist she stop making the interest payments since it's all our money anyway. Nor will I require her to make the ballon payment although the promissory note will stay in place indefinitely.

I know all of these would be self-dealing/prohibited transactions if my SDIRA had purchased the property, but it didn't. The only connection is that it's the security for the promissory note so that's where the confusion is. I've also heard reference to "sweetheart deals" not being allowed but I've only seen that in relation to the percent of interest charged on the loan. I will be charging a market rate although I won't be enforcing payment.

I know the violation penalties are stiff, so I definitely want to stay within the laws. That's why I'd like to find out what I can and can't do and I haven't been able to find any answers online for this type of transaction. The one thing that would make the answers simple is, does the IRS consider the SDIRA the owner of a property that is only the security on a promissory note? That would make all my concerns violations of tax laws. 

Thanks for any input and especially if you can point me towards the specific tax code addressing a situation like this!

[Brett Synicky]

Quote from @Eric Clance:

I'm interested in opinions regarding the tax laws of SDIRA's.

I'm considering loaning my fiancé $100k from my SDIRA so she can pay off the current short-term loan she used to purchase an investment property. This loan would be an 18-month, interest only, with ballon payment, promissory note secured by deed of trust on this investment property. 

Because we are engaged but don't plan to actually get married, therefore not disqualified, I want to help her as much as possible with the property and finances. Will any of the below items I plan on doing be considered self-dealing or prohibited transactions?

1. Provide myself as "unpaid" labor for the renovation process.

2. Manage the purchase of materials for the renovation.

3. Upon renovation completion, give her my furniture to furnish the property as a short-term rental.

4. Help to clean the property between guests.

5. Spend nights together at the property.

6. I also plan to insist she stop making the interest payments since it's all our money anyway. Nor will I require her to make the ballon payment although the promissory note will stay in place indefinitely.

I know all of these would be self-dealing/prohibited transactions if my SDIRA had purchased the property, but it didn't. The only connection is that it's the security for the promissory note so that's where the confusion is. I've also heard reference to "sweetheart deals" not being allowed but I've only seen that in relation to the percent of interest charged on the loan. I will be charging a market rate although I won't be enforcing payment.

I know the violation penalties are stiff, so I definitely want to stay within the laws. That's why I'd like to find out what I can and can't do and I haven't been able to find any answers online for this type of transaction. The one thing that would make the answers simple is, does the IRS consider the SDIRA the owner of a property that is only the security on a promissory note? That would make all my concerns violations of tax laws. 

Thanks for any input and especially if you can point me towards the specific tax code addressing a situation like this!

Easy way to think about prohibited transactions regarding self dealing is that you can do white collar work but not blue collar work. So what you’re describing would disqualify the entire IRA including that investment. Don’t test the IRS on this. Also you’re the fiduciary of the plan so you have to ask yourself if doing this loan is in the best interest of the IRA.