Self-Directed Loan Legalities

[Adam Johnson]

A friend of mine and I plan on rolling over old 401k's into self-directed IRA's.

We then plan to loan each other money, and use that money to flip houses.

So, I loan 80k to him, he loans 80k to me....we have 160k to buy and fix a house. Is this fair game, or are we missing something important here?

[Brian Eastman]

@Adam Johnson & @Brandon Hall 

Yes, Adam and his associate could effectively pool their IRA funds to joint venture into real estate transactions together. The idea is that it would be the IRA's doing the investing, and not Adam and his associate.

The returns would go to the IRA accounts. There is the additional limitation as @Daniel Dietz points out, that they would only be allowed to "direct" the investments and could not participate with their own labor or the labor of parties disqualified to either IRA.

Flipping is something that can be done with IRA funds, but comes with exposure to taxation known as UBTI, as this is viewed as a business activity as opposed to a passive investment such as rental income or note payments received. Even with this tax, the IRA can potentially receive ROI that is favorable when compared to other investments one might make with an IRA.

An alternative approach for using an IRA with flip opportunities is to be the bank rather than the flipper. Lend money to someone flipping a house and that interest is deemed passive and therefore not subject to UBTI. Of course, Adam's IRA should not lend to his friend to flip, while his friend is at the at the same time using his IRA to lend to Adam to flip, as this would still be looked as an an indirect transaction between each parties IRA and themselves.