Just listened to Gabe DaSilva's interview on the podcast and he mentioned that he partnered with his SDIRA on his first flip. Could someone clarify how that works and the nuances that need to be worked out so that it would not be considered a disqualified transaction? In my scenario, I would be bringing in my own money and partnering with monies from my SDIRA at a certain % split. Afterwards I'd split the profits equally. That is how it would play out in my head.
what is the reason for this partnership? Why not do the entire deal in your IRA (or personally)?
I would like to be able to build up enough liquid to do flips/buy and holds without waiting till I retire to realize the profits. Personally, I don't have the cash unless I go through a lender which can become expensive.
you can't personally benefit from your IRA, that would be considered "Prohibited Transaction". Your proposal won't work. If you wish to realize profits personally - you must use your personal savings for that, not your retirement funds.
@Dmitriy Fomichenko From what I read of @Eric Jan description it sounded like he wanted to split between his SDIRA and cash so that the funds from the proceeds of the sell will also split to those resources. Is that not possible?
For instance using arbitrary numbers, $50k from SDIRA and $10k cash for the deal (buy and rehab) and then sell for $100k with % splits back to SDIRA and him for cash.
While I don't use my SDIRA for flipping, I have used it for Mortgage note purchases and also had cash in the same deal. I spoke with the self-directed company that has my IRA and explained to them what I wanted to do and they told me what was legally allowed. Different scenarios.
The way I've seen "partnerships" with SDIRAs is with multiple different IRA holders, as below with three accounts and two individuals, one person using a traditional (30%) IRA and Roth (20%) IRA to make up his or her 50%. I have also seen individuals 'partner' with a SDIRA account like this, but I would think they are not related to the SDIRA holder.
Let's clarify what we call partnering. True partnering does not break the rules. For example, you can buy and lease a commercial property 50/50 with your retirement account, as long as you do not personally manage the property.
In a case of a flip, it is much more dangerous. What you, Eric, envision is essentially borrowing from your SDIRA - and that is strictly prohibited. It is possible to structure an arms-length partnership with your IRA on a flip, but it's a tricky setup to avoid violating prohibited transactions rules, due to your heavy personal involvement. Definitely NOT something you should try on your own, even after asking questions on BP.
I have not heard the podcast you've listened to, but I would not be surprised if that investor took dangerous shortcuts and risked violating the IRS rules. Such risk is not worth taking.
While it is possible to structure a partnership between an IRA and disqualified person, the majority of cases I had the opportunity to review such proposed partnership would result in a prohibited transaction. As Eric explained earlier he personally does not have enough cash to do the deal on his own and have to partner with his IRA to make it possible. The result - he is getting personal benefit from his IRA which is disallowed.
Whenever there is a disqualified person involved in a transaction with qualified plan - there is always risk of a prohibited transaction. There are so many safer ways to make money, why risk it???
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