Investor · Haverhill, MA · Member since 2016 · 28 posts · 8 votes
I am partnering with a friend on a flip. Part of his funds will come from my SDira. He will be signing a promissory note and borrowing money from my SDira and paying interest. He will then use this money to help pay for the flip - both acquisition and rehab. I will be putting in my own cash as well. Is this ok?
I've run this by my custodian (Equity Trust) and they are giving me the thumbs up but I wanted a second set of eyes.
The support person you spoke with at Equity Trust is just flat out wrong. Unfortunately, they are known to do that. The reality is that as a custodian, they are not allowed to provide tax, legal or investment advice. They provide "customer service" and do so with not very well trained staff.
A LLC that you own personally is a disqualified party to your IRA. If your IRA loans money to an unrelated 3rd party, who then puts that money into your personal LLC, or a transaction with your personal LLC, this is very clearly a prohibited, self-dealing transaction.
Investor · Cleveland, OH · Member since 2015 · 39 posts · 14 votes
9y
I am not a SDIRA expert but I do invest using one. It sounds to me like an indirect benefit which is not permitted. Here is a link to an Equity trust web page. Look at the paragraph for indirect benefit. I know Equity is highly trusted and reputable. Maybe you were talking to a new person there or you really didn't explain it clearly to them.
That would be deemed a prohibited transaction. Reason being, your are loaning your IRA to a friend for the purpose of him then using those funds to partner in a real estate purchase where you will also use personal funds towards the purchase. This is known as a straw-man or roundabout transaction which is also prohibited. You can't do indirectly what is not allowed directly.
Rental Property Investor · Gainesville, FL · Member since 2015 · 1k+ posts · 432 votes
9y
Hi Michael,
May I inquire how the payments will be made back to the sdira? Is it as simple as the partner writing a check in the name of the SDIRA and you forwarding that to Equity or does there need to be a servicer involved to collect from him and they send to Equity?
That would be deemed a prohibited transaction. Reason being, your are loaning your IRA to a friend for the purpose of him then using those funds to partner in a real estate purchase where you will also use personal funds towards the purchase. This is known as a straw-man or roundabout transaction which is also prohibited. You can't do indirectly what is not allowed directly.
Would this be allowed if no personal funds were involved. Would this be allowed to loan directly from the IRA to the partner and then those funds with interest be paid back to the IRA?
Professional · Highlands Ranch, CO · Member since 2016 · 18 posts · 3 votes
9y
Hello, no, you are a disqualified person of your own IRA, you can loan monies from your IRA to another individual or company that you don't own. By adding personal funds with ira is not allowed directly through an Ira acct there is an exception by setting up a ira LLC
Investor · Haverhill, MA · Member since 2016 · 28 posts · 8 votes
9y
@George Sass, @Mark Nolan, @Daria B., - Thanks for your replies. Yeah, the indirect benefit is what I'm worried about.
I called Equity Trust Gold support again and ran the scenario: "I'm partnering with someone one a real estate flip. I'm planning on loaning him money via a promissory note from my SDira. He will then use this money to buy into the flip with me. Is that a prohibited transaction?"
Her answer was no - it was not prohibited. She said it was two completely separate transactions and he is not a disqualified individual. I also asked if he could be a partner in my LLC that I'm buying the house with or if I needed to keep him separate. She said he could be a partner, again, because they are two separate transactions.
I ran another scenario where I loaned my sister money via promissory note and that we took ownership of a buy/hold property together 50/50 as individuals (no LLC). She said this was also ok to do.
Professional · Highlands Ranch, CO · Member since 2016 · 18 posts · 3 votes
9y
You can set up a Ira-LLC and add personal funds and ira funds one time only, then your locked out from adding any more funds to the LLC checking account after funding , the LLC can also borrow funds, through non recourse lending UDFI would apply.
If you fund an ira-LLC with retirement funds only you can add future retirement funds at a later time for additional capital
Investor · Haverhill, MA · Member since 2016 · 28 posts · 8 votes
9y
@Daria B. - Yes - my partner would write checks made out to the SDira and send to me. I forward to Equity Trust accompanied by a deposit coupon. It's very simple.
Thanks for your replies. Yeah, the indirect benefit is what I'm worried about.
I called Equity Trust Gold support again and ran the scenario: "I'm partnering with someone one a real estate flip. I'm planning on loaning him money via a promissory note from my SDira. He will then use this money to buy into the flip with me. Is that a prohibited transaction?"
Her answer was no - it was not prohibited. She said it was two completely separate transactions and he is not a disqualified individual. I also asked if he could be a partner in my LLC that I'm buying the house with or if I needed to keep him separate. She said he could be a partner, again, because they are two separate transactions.
I ran another scenario where I loaned my sister money via promissory note and that we took ownership of a buy/hold property together 50/50 as individuals (no LLC). She said this was also ok to do.
Investor · Cleveland, OH · Member since 2015 · 39 posts · 14 votes
9y
My best advice then is tread lightly. As I said in my previous post, I am not a SDIRA expert. If the experts are telling you that it is okay and you are comfortable with that, then move ahead with the transaction. I personally would feel real uneasy about the whole transaction and I wouldn't want to risk losing a good chunk of change. I am not a customer of Equity. If they advise you one way or another and this gets challenged, do they stand by their advise and back you or are you on your own?
The support person you spoke with at Equity Trust is just flat out wrong. Unfortunately, they are known to do that. The reality is that as a custodian, they are not allowed to provide tax, legal or investment advice. They provide "customer service" and do so with not very well trained staff.
A LLC that you own personally is a disqualified party to your IRA. If your IRA loans money to an unrelated 3rd party, who then puts that money into your personal LLC, or a transaction with your personal LLC, this is very clearly a prohibited, self-dealing transaction.