BRRRR method using IRA partnered with personal funds

6 Replies

Hello,

I have been working on a investment plan and would like some guidance. I want to purchase a property with cash from a IRA and put the IRA and myself as percentage owner on title. I spoke with the self directed IRA custodian and they said this is acceptable.

Example: Buy a $110ARV for $80K cash with IRA funds. Use $10K personal funds (Line of credit) to rehab. Rent the property out for one year.

The part I would like more help understanding is the "refinance" portion. Would a lender refinance the property to me, so I can get the cash back to the IRA? Or would they do a completely new loan? Or is this not normal practice?

The property would be in Dallas, TX.

Any help is appreciated.

Thanks in advance!

-Arun Chandra

Arun Chandra MBA, AChandra Investments LLC | http://www.chandrarealestate.com | CA Agent # 01983864

@Arun Chandra

I would not recommend this strategy. While it is possible to joint venture between and IRA an a disqualified party such as yourself, there can be no direct or indirect benefit between either party and the other.

You can have a clean transaction where each party covers its own share of expenses and receives its own share of profits, and still create an indirect benefit.  Such benefit would be enabling a party to the transaction to engage in an investment that it could not without access to the other party's funds.  

If either party could do the transaction on its own - including with the use of debt-financing such as a mortgage - then there is no benefit provided if you choose to joint venture with your own funds.  

Your IRA could not, with $10K, engage in this transaction. As such, you personally are providing a benefit to the IRA by allowing it to joint venture with you.

Everyone needs to be aware that IRA custodians are not in a position to provide tax or legal advice, and the guidance they provide on such technical matters should always be corroborated with a licensed tax professional.

Medium safeguard rgb stackedBrian Eastman, Safeguard Advisors | [email protected] | 855‑997‑2298 | http://www.ira123.com

@Arun Chandra

You appear to be describing a tenants-in-common transaction. Here is a brief overview of the rules under this type of transaction:

The real estate property is purchased at the same time and debt financing is not brought to the table.

Further the property cannot be purchased from a disqualified party. For example, if Smith's IRA buys the property from John Smith's son it would be prohibited even if purchased under a tenants in common scenario.

Medium mysolo 401k logoMark Nolan, My Solo 401k Financial | [email protected] | 800‑489‑7571 | https://www.mysolo401k.net/

@Arun Chandra

the transaction you are describing appears to be prohibited so I would also advise against going this route. Just do this deal in an IRA. Your IRA has sufficient funds for the most of the purchase price, you just have to find a lender to finance small portion of the property.

This way you'll stay out of trouble. 

Medium logo 19 1Dmitriy Fomichenko, Sense Financial | [email protected] | (949) 228‑9393 | https://www.sensefinancial.com/free-consultation/ | CA Agent # 01876563

Wow. I am very glad I decided to post on this before moving forward. 

I guess I will look for properties that can be purchased solely by the IRA and avoid the partnership route.

Thanks again everyone for your responses.

-Arun Chandra

Arun Chandra MBA, AChandra Investments LLC | http://www.chandrarealestate.com | CA Agent # 01983864

Originally posted by @Brian Eastman :

@Arun Chandra

I would not recommend this strategy. While it is possible to joint venture between and IRA an a disqualified party such as yourself, there can be no direct or indirect benefit between either party and the other.

You can have a clean transaction where each party covers its own share of expenses and receives its own share of profits, and still create an indirect benefit.  Such benefit would be enabling a party to the transaction to engage in an investment that it could not without access to the other party's funds.  

If either party could do the transaction on its own - including with the use of debt-financing such as a mortgage - then there is no benefit provided if you choose to joint venture with your own funds.  

Your IRA could not, with $10K, engage in this transaction. As such, you personally are providing a benefit to the IRA by allowing it to joint venture with you.

Everyone needs to be aware that IRA custodians are not in a position to provide tax or legal advice, and the guidance they provide on such technical matters should always be corroborated with a licensed tax professional.

Great information. Brian, what would be a practical example of a partnership with your own IRA where it is not needed (but wanted) (and worth the administrative burden and risk)? Maybe it's a case where you preserve taxable funds when you have a lot of liquidity (could do transaction on your/its own) for later periods when you anticipate on not having that liquidity.

@Mike Dymski

We caution against such transactions.  While it is potentially feasible, there is only the conjecture of tax attorneys to rely on and nothing in stone from the IRS or case law.  It would be irresponsible of me to say "here is how you can do this".

The key as I stated above is that there can be no direct or indirect benefit, and that would include the ability of either side to do the transaction on its own without the availability of the other parties funds.

95% + of the people that are considering doing this, probably should not.

For those who could, the question becomes why, when there are so many ways to successfully put your IRA to work, generate good returns, and not take on the extra risk such a JV transaction might bring.

Medium safeguard rgb stackedBrian Eastman, Safeguard Advisors | [email protected] | 855‑997‑2298 | http://www.ira123.com