Prohibited Transaction?

7 Replies

My Roth IRA owns less than 10% interest in an LLC that invests in commercial real estate. One of the projects of the LLC is now completed and we are ready to list it.

Can I be the listing agent for this transaction since I own less then 49% interest in the LLC or would this still be a prohibited transaction?

Thank you in advance for your feedback!

David,

Not an attorney but ANY self dealing within a SDA IRA is considered a prohibited transaction. I would not take the chance or risk of penalties to save on some RE commission. From what I have read and researched you can't even change a door knob. Kills me to pay someone to do these things but not worth the risk to your entire investments.

If you still want to do this I would check with appropriate tax accountant who is very familiar with these types of IRA's. There are not many out there who are very good and your custodian will not give you an answer for fear of being wrong.

Good luck

Pete

Originally posted by @David Frol :

My Roth IRA owns less than 10% interest in an LLC that invests in commercial real estate. One of the projects of the LLC is now completed and we are ready to list it.

Can I be the listing agent for this transaction since I own less then 49% interest in the LLC or would this still be a prohibited transaction?

Thank you in advance for your feedback!

Very blurry cryptic language with regards if it is a prohibited transaction. It may or may not based on how you look at it. You would of course have to disclose to the buyer that you have an interest in the property that was being sold from an ethical perspective.  Also, is the buyer a relative? 

Don't do it. You will receive a personal benefit from the sale in the form of a commission. Even if you worked for free it could be interpreted that you provided value in the form of a service to the SD IRA. The potential benefit, the commission, is small. The risk is the destruction of your SDIRA. Do you want to give a clerk at the IRS the chance to make their bones at your expense?

The LLC manager can be the listing agent as long as he or she does not receive a commission.

@Mark Nolan

I am not the manager of the LLC, my IRA is passive investor in the LLC. And it owns less than 10% interest of the LLC.

@Mark Nolan

In the case of an IRA LLC, or just an IRA, the IRA account holder/LLC manager provides the services of being a licensed realtor to the plan - for free - would you suggest this is not providing a benefit to the plan?

That seems like a pretty aggressive stance, and one the IRS could easily disagree with.  This is not something we would advise our clients to do. "Maybe" might cut it for you, but for the client, that is an unacceptable risk.

A licensed realtor brings a lot to the table in terms of licensing, insurance and time.  Giving this to the plan would certainly seem like providing a benefit.

In @David Frol 's case, there is the mitigating factor that his IRA is only a 10% equity holder in the property LLC, and therefore that property LLC is not a disqualified party to his plan - but, that still precludes David from providing a direct or indirect benefit to his plan, and serving as realtor for the LLC partially owned by his IRA-LLC would pretty obviously be such an indirect benefit.

@David Frol

You're definitely standing on the line between right and wrong in this situation. The conserative path would be to use a non-disqualified third party to list the property. An indirect benefit arguement is obviously present since you own 10% already.

Do you stand to make a great commission? If so, perhaps its worth having an attorney provide you with a blessing in writing that you can look to if you're audited. At least that way you can show due process because there wasn't an obvious answer.

Can you sell your 10% to a fellow investor before listing the property for sale?

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here