Can you and your SDIRA buy together??

2 Replies

I was just reading another post  and someone said that you can NOT buy along with a family member's sdira. I was under the impression that you could, but not sell to or buy from. 

I know that I can not sell a property to my parent's sdira or their sdira can not sell me a house. 

Can my parent's sdira put up 50% of the cash and I put up 50% of the cash and we buy the house in both our names (parents sdira and rick pozos)???

@Rick Pozos

This is a gray area, dependent upon the specific facts and circumstances.  There is no solid IRS opinion either way.

The IRS rules prohibit the conveyance of benefit – directly or indirectly - between an IRA/401(k) and a disqualified party to the plan.

There is an interpretation within the self-directed tax advisory community that an IRA or 401(k) may joint venture into a new project with a disqualified party under the following circumstances:

  1. Both parties enter into a joint venture together – i.e. fund closing on a property together. You would not want to start a project with party A and then bring in disqualified party B six months later when you ran out of capital.
  2. The equity participation in the deal, once established at inception, must not be changed. So if you capitalize with 50/50 funding or 80/20 funding, you must always keep that ratio in all future expenses and income.
  3. One party may not benefit from access to the other parties funds. This is where things get a bit vague and subject to interpretation, and why we urge caution when considering such transactions.
  • Benefit would include things such as one party being enabled to participate in a transaction that under ordinary arms-length scenarios would be out of reach. If both parties "could" do the transaction on their own (including with the use of a non-recourse mortgage) yet "elect" to JV, that is fine. If either party would really not be able to complete the transaction on its own, there is risk this could be viewed as a benefit conferred by the other party and therefore a prohibited transaction.
  • Benefit would also include one party having access to the other parties funds for their own benefit. So if one party is doing the administration of investments, they should frequently reconcile with the other party so as not to incur earnings from idle capital in a savings account, for example.

Based on consultations with our tax attorney and the chief compliance officers of several custodians we work with, we are cautious abut clients pursuing such JV transactions. This is an area where the specific facts and circumstances of a transaction would be evaluated by the IRS with regards to compliance with the rules in the event of an audit. We cannot provide a clear black and white assessment of what is OK and what is not. That lack of clarity introduces risk. When there are so many non-risk ways to put IRA money to work. Why go there?

We are especially cautious with respect to such transactions on a web forum where there is a tendency for folks to interpret as they wish rather than seek professional advice. 

@Rick Pozos

The answer that @Brian Eastman provided was excellent. Many individuals do the transaction you describe and later find out that they can't buy out the IRA or the Ira can't buy out the disqualified person if they want to end the JV. They often make the mistake thinking they can get a recourse loan in their personal name which is not the case.

THE "Adler" opinion letter can shine more light on the family investing together but it is an opinion letter and not a court ruling. 

If you do this type of transaction open a seperate IRA account to isolate a possible prohibited transaction and minimize the risk. Figure out your exit strategy prior to initiating the transaction so you are not surprised and or penalized later.

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