Can I loan my partner SDira funds to do a flip?

Question

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.

Brian Eastman · Answer

@Michael Murray

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.

Mark Nolan · Answer

@Michael Murray

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.

Account Closed · Answer

The part that raises the concern for me is, if you are doing a "loan" to your friend to buy into a partnership then that might be prohibited.

If you are just doing a straight loan then I do not see any problem.

Bryan O. · Answer

@Michael Murray listen to @Brian Eastman. Your "support" person is a fool.

George Sass · Answer

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?

Michael Murray · Answer

@George Sass, @Mark Nolan, @Daria B.

Reposting this because the tags didn't work:

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.

Michael Murray · Answer

@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.

Michael Murray · Answer

@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.

Can I loan my partner SDira funds to do a flip?

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