Self directed Ira and partner

[Sunny C.]

I have a self-directed IRA and we have found a property that I need to rehab as my self-directed IRA does not have sufficient funds I have entered into a partnership with an individual and we are going to go 50 50. On this project. I would really appreciate if somebody can guide me on some of the issues I am facing. 1.Can both of the self-directed IRA and the individual open an LLC. This LLC will then own the property. 2. Can both the self-directed IRA and The partner be on the title of the property. Effectively I would assume that the LLC will be on the title of the property. 3. Are there any special tax issues given that the IRA and the partner are doing this project. Or is it simple enough that the price profits are divided amongst the IRA and the individual once the property sold. 5. Is it possible for me as an individual and my IRA to both contribute to the project as my IRA might not have sufficient funds. Is that allowed so effectively contribution of the funds will be from the IRA, myself, and then the partner, or do I have to have the IRA and the Partner exclusively be on the project. 4.any other guidance on this would be highly appreciated as this is my first project. Thank you very much for all your help.

[Dmitriy Fomichenko]

Sunny,

Yes as long as the other party is not considered "disqualified" by the IRS you can create a partnership.

The partnership can be in the form of TIC (Tenants in common, both of you will be on the title of the property) or you can create a new entity where both your IRA and the other partner can be the members.

You must keep the ownership percentage the same at all times and all income/expenses must be split according to your ownership percentage.

Be sure to seek help of a professional who can guide you and structure this correctly so you can avoid violating prohibited transactions rules:

https://www.irs.gov/retirement-plans/plan-particip...

[Dmitriy Fomichenko]

Sunny,

Yes as long as the other party is not considered "disqualified" by the IRS you can create a partnership.

The partnership can be in the form of TIC (Tenants in common, both of you will be on the title of the property) or you can create a new entity where both your IRA and the other partner can be the members.

You must keep the ownership percentage the same at all times and all income/expenses must be split according to your ownership percentage.

Be sure to seek help of a professional who can guide you and structure this correctly so you can avoid violating prohibited transactions rules:

https://www.irs.gov/retirement-plans/plan-particip...

[Daniel Dietz]

@Sunny C. one thing I did not see mentioned on this or the other discussion you started is that I *think* of your IRA is involved in a project in any way then you yourself are not allowed to participate in the labor component of it at all.

I did not see you mention that either way if you were or were not planning on it. Just an FWI as you are looking into this. 

Dan Dietz

[Daniel Dietz]

@Dmitriy Fomichenko or others, I have seen a couple of opinions in different discussions that seem to contradict each other in regards to partnerships and future deals in that partnership also.

An example is that I have been talking to a couple of potential investing partners that might want to roll over IRA or 401 funds into a SDIRA or SOLO401K to invest within buy-n-hold rentals.

Our thought is that we would from an LLC, with their SDIRA being 50% owner and me being a 50% owner. They would bring the down payment 0f 20-25% from their SDIRA and the LLC would borrow the other needed funds of 75%-80% using a commercial loan that does not need a personal guaranty from them at all (since that would be a prohibited transaction). My roll would be to find, acquire, rehab if needed, and to do all ongoing PM duties. We would split cashflow and eventual capital gains when we sell 50-50.

Questions;

1) Would this type of arrangement be better for the SDIRA to invest ''directly" or to form an LLC with the SDIRA being the only member?

2 )Why is ask it that way is that I have heard reference to "once the SDIRA does the original investment into a property or LLC that they can THEN never make 'additional contributions' for future deals", such as a second property that the LLC partnership might want to buy. How can that hurdle (IF I am understanding it right) be dealt with?

3) Would anything change if we used TIC instead of LLC, or if they used SOLO401K instead of SDIRA?

Thanks, Dan Dietz

[Dmitriy Fomichenko]

@Daniel Dietz,

I'm not sure if I understand you correctly but I think your flaw in this proposal is when you say the only one partner will bring money contribution to the partnership. If the IRA owns 50% of the partnership the IRA must contribute 50% of the capital, not 100%.

I suggest you consult with an attorney regarding proper structuring of such partnership so that each parties interest is protected.  

[Daniel Dietz]

@Dmitriy Fomichenko, 

You DID understand what I was saying. When we have set up LLCs outside of the realm of SDIRAs we have been able to set up the operating agreement in a way where one partner did the down payment of 20%, the other partner borrowed the remain 80%, but we are sharing all cashflow and capital gains on a 50-50 basis since the second partner is doing all of the ongoing work. 

What I hear you saying is that using this structure of 'a percent ownership that does not match capital contributions' is not allowable when using a SDRIA as part of the structure? 

Would the SDIRA own 100% or 20% if the second non-SDIRA partner was bringing 80% of funding from the loan that would be obtained for that portion of funding?

I will run this by our attorney also. Just working on a conceptual idea at this point. 

Thanks again, Dan Dietz

[Dmitriy Fomichenko]

@Daniel Dietz, thanks for the clarification. While your proposal may work with non-qualified funds it will not work with qualified funds. If you are using IRA it can make capital contribution based on the ownership percentage. So if it is 50/50 ownership each partner would have to contribute equal amounts.

[Daniel Dietz]

@Dmitriy Fomichenko,  or others, 

Following along with the thoughts that 1) A Self Directed Account 'can only buy the percent share of their capital contribution' (meaning 20K in on a 100K property can only = 20% ownership) and 2) That it IS legal for a person to invest 'along with' their own Self Directed Account I have the following question before I spend the money on a lawyer to work on moving forward. 

I want to be 50/50 partners with someone. They have funds in their Self Directed account for a down payment of 20%. We both have good credit and established ties with a commercial lender who will do a non recourse loan for the other 80%. 

Would it be feasible for; partner to contribute 20% down payment with SDIRA or SOLO401K and personally borrow 30% (for his total of 50%) and my to borrow the other 50%? Essentially a "20/30/50" arrangement. 

If that would not work, would it work for his SDIRA to put 10% down, my non retirement LLC to put 10% down, and then jointly borrow the other 80% together?

Thanks, Dan Dietz

[Dmitriy Fomichenko]

@Daniel Dietz,

You probably have seen my answer to this question before, but here it is again:

“Can I partner with my self-directed IRA to make a joint investment?”

Answer:

You are considered "disqualified person" to your IRA. IRS rules prohibited any direct or indirect benefit for such person from his/her retirement account, and as such you are not allowed to furnish any service, goods or facilities to your 401k:

https://www.irs.gov/retirement-plans/plan-particip...

While in some instances it might be possible to get into an investment together with a disqualified person you must be very careful! In my experience dealing with thousands of clients and reviewing many potential transactions involving disqualified person the end result was a prohibited transaction. You also must remember that while in the beginning transaction might be structured in compliance with the rules there is always likelihood of it leading to prohibited transaction in the future because of disqualified person's involvement.

Once you have your personal funds and IRA funds in the same deal you are now opening a Pandora's box and the burden falls on you as the tax payer to proof that there are no personal benefits from your use of the IRA funds, and IRA did not benefit from the use of your personal funds. In most cases that is exactly why the IRA account holder wanted to partner.

So my advice to you, to your potential partner and everyone else reading this: do not pull personal funds together with your IRA funds into the same deal. There are many other ways to invest your money without putting your entire IRA at risk, it's not worth it.

[Dmitriy Fomichenko]

... also, regarding you getting a loan with this proposed purchase: the credit of the IRA account owner would not be of weight here, the loan must be non-recourse, the IRA account owner can not personally guarantee this loan. In my experience most lenders will require ~40% down for non-recourse financing.

Your last scenario should work: you create a 50/50 partnership with two partners

Partner 1 - SDIRA 50% ownership

Partner 2 - LLC owned by Dan Dietz 50% ownership

You each must contribute equial amounts of capital to fund this partnership.

Keep in mind that you probably will need to make larger contribution so you have some reserves if you are planning on purchasing investment property. Partner 1 can't provide personal guarantee for the loan.

[Sunny C.]

one thing my custodian is telling me is that the Ira has to be less than 50% owner of the LLC. The LLC was setup with 50% owenership by the IRA. Is that correct.

[William W. Humphrey]

Hi Sunny,  

That 50% concept is most commonly applied to the scenario in which the IRA is buying ownership in an existing LLC. In that case the IRA can't invest in an LLC that is more than 50% owned (aggregate) by DQ persons/entities.

If I understand your thought process, your IRA is going to purchase a percentage of a new LLC, not previously owned. If that is the case, your IRA owning 50% would not be problematic.

[Daniel Dietz]

@Dmitriy Fomichenko or other Plan Professionals, 

I hear what you are saying about having different rules as far as capital contributions in a self directed account vs just a traditional LLC outside of such an account.

I am trying to figure out a way that a partner can have 50% equity for the least amount of capital outlay from their self directed account to do so. I do have a portfolio lender that I have used for other deals who has indicated that he is willing to let us do less than 40% down non-recourse as long as the LTV was in the right area.

My other thoughts of how to accomplish this would be ; Partner 1 puts 10% down with their SDRIA, Partner #2 puts 10% down with cash or their SDIRA. The two of them as partners or LLC borrow the remaining 80%. I see this as each of them put 50% of capital in and are 50% responsible for the loan.

Does this sound like a 'more compliant' way of doing things and still keeping a low down initially for those involved? These would NOT be disqualified people to each other. 

Thanks, Dan Dietz

[Dmitriy Fomichenko]

@Daniel Dietz, this should work as long as the loan is non-recourse. 

[George Blower]

@Sunny C.

If both the IRA and the individual pools their funds in the same LLC, then title to the property would be in the name of the LLC.

Also, while IRAs are already afforded full creditor protection in New Jersey, the LLC is ideal for pooling multiple investors funds.