Can my Equity Partner (Father) Invest in my LLC with SDIRA Funds to Flip Homes?

8 Replies

Hello BP World:

My equity partner is my father. We are going into business together to flip homes in FL and are looking for some advice. I am setting up an LLC, and he is planning on investing in my LLC as a minority shareholder from a separate LLC. He will be providing 100% of the capital for our flips and I will be doing all of the work on the ground.

He is interested in funding our flips from an SDIRA. Is this possible with this sort of business structure? I know that I am considered a disqualified person as I am a family member with direct lineage.

Is it possible for his separate LLC to invest in mine (listing him as a MGR in my LLC - or not), or is it still considered self-dealing or him receiving indirect benefits? We are trying to figure out the best possible way for him to fund our flips, and if using an SDIRA is even possible.

Any help is much appreciated!

Thanks,

Jon

@Jonathan Drago

Absolutely not.

You and any business you control are viewed as a disqualified party to your father's IRA. Any direct or indirect transaction between his IRA and such a disqualified party would result in a self-dealing prohibited transaction for his IRA with severe tax consequences.

Your father's IRA could be used to form a new real estate development business using a Rollover as Business Startup program. That is a pretty extreme commitment on his part to your business, however.

I have been looking into this lately in order to do something similar with my 401k. As far as I know you will not be able to do this. 

The only way i have seen that works well is if you guys have a third unrelated party that is not a disqualified party that can do the flips. He can then lend money to the entity of the third party. As long as he is completely passive and the third party essentially runs the flip its doable. The returns then go back into the IRA/401k.

There might be other ways but i haven't finished my research. If i run into other ways for this to work i can share them.

Thanks for the feedback. I didn't think it was possible to do with the SDIRA, based on all the legalities regarding the disqualified party. We just needed some confirmation. Obviously we will be working with a RE attorney and CPA before making any commitments.

Thanks!

@Jonathan Drago

Flipping real estate under a self-directed IRA will trigger a tax called UBIT.

The ROBS 401k may be a good fit for you if you want to get into the flipping game as it will not be subject to UBIT  and it will allow you to fund your own real-estate operating company using retirement funds. Your father could even be an employee of the real-estate operating company.  

The following IRS links talk more about the ROBS 401k arrangement.

http://www.irs.gov/Retirement-Plans/Employee-Plans...

http://www.irs.gov/pub/irs-tege/robs_guidelines.pd...

Originally posted by @Mark Nolan :

@Jonathan Drago

Flipping real estate under a self-directed IRA will trigger a tax called UBIT.

The ROBS 401k may be a good fit for you if you want to get into the flipping game as it will not be subject to UBIT  and it will allow you to fund your own real-estate operating company using retirement funds. Your father could even be an employee of the real-estate operating company.  

The following IRS links talk more about the ROBS 401k arrangement.

http://www.irs.gov/Retirement-Plans/Employee-Plans...

http://www.irs.gov/pub/irs-tege/robs_guidelines.pd...

 Thanks for the note and references, Mark. I'll definitely research this more.

@Mark Nolan Sorry, I said "Rob." I typed that thank you as I was reading the ROBS guidelines. Rob in my brain space.

@Jonathan Drago

Make sure you have a conversation with your CPA regarding "Unrelated Business Income" as it may apply in your situation. The ROBS structure is not exempt from UBTI.  

My mistake, I just realized that the C-corp becomes the investor once a ROBS arrangement is funded, not the 401(k). 

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