I had a question for anyone who might know. When you use a Self Directed IRA to fun the down payment and the rehab of a project and then when you give the ROI back to who you got it from, can you give it to them in cash or a check instead of the earnings having to go into the IRA. The money that they invested will go back into the IRA but the money they make will be cash. Is this at all possible? I'd appreciate the help if anyone has any experience on the matter. Thank you!
I'm sorry, but it is impossible to determine what exactly you are asking.
If the IRA receives profit from a deal, then the profits must be returned to the IRA.
If the IRA is partnering with another investor, then that person will receive their profit directly from the closing process, not typically from the IRA.
When you are using IRA to make an investment you can't deal with cash, has to be check or wire transfer. All investment income and investment returns must go back to the IRA. Also, if the IRA is the buyer the loan must be non-recourse, you can't use conventional financing because personal guarantee is not allowed.
If I've properly understood you, it seems the scenario is one in which the IRA was the equity partner on a buy and rehab project. In that case, all returns - return of capital plus ROI per the agreement- belongs to the IRA. Anything that belongs to the IRA should go back to the IRA.
If the IRA account-holder takes those funds personally, there is a possibility of adverse tax consequences.
I am sorry, I don’t think I worded it very well, but you have answered my question. Thank you so much for the replies!
What you suggest is prohibited. You don’t get to reap the Beniifits directly from your Ira risk. The following are some options others have done.
Put all the money back in the Ira. Take out what you want as a distribution. The withdrawal/distribution may be tax free, taxed with 10% penalty, or just taxed- -dependent on age, type of Ira, and what withdrawal is used for.
Another option —If you can do the total deal in 60 days you can take the money out, use it for whatever deal, and put it back in the Ira in 60 days and keep all the profit personally —you are allowed to do this once per 12 month period. You personally will have to pay tax on the profit you make.
People sometimes forget that the money is not locked up in the IRA. At worst you pay the tax plus 10% if you really need the money.
Thank you. That is good to know about the different ways it could be taxed if you do want to take the money out of the IRA. Still won't work since I would not be able to use my moms IRA.
If I am correct, it is also not allowed to invest an IRA in an in-laws deal either. For example, my moms IRA investing with just my husband and not technically with me. I believe this is also not allowed, correct?
Correct that your spouse would also fall under the disqualified party umbrella.