Legitimate Self Directed Strategy or not?
I was talking to another investor who proposed the following as a solution investors looking for more flexibility when using their SDIRA.
Two unrelated individuals arrange to make a loan to one another using their SDIRA funds. Terms of the loans are exactly the same including principal, interest rate, term, and the origination date. All things being equal, the required monthly payment would then be the same between borrowers.
The pro arguments for this arrangement would be the following:
1. Both borrowers would have control to use their "borrowed" money however they see fit.
2. This would be really cost-effective if your custodian charges access fees and moved your funds around a lot.
3. You could avoid UBIT.
4. IRS's non-recourse requirement would no longer apply, so you could utilize these monies as down payments.
5. You could expense the cost of capital and in effect shelter some of your earning as tax deferrred.
As an example: I can make a consistent cash-flow profit of 10% per annum. In finding a like-minded individual, I could essentially defer taxes on my earnings while still taking advantage of depreciation. The interest rate of the note would be just under the projected net income. My IRA grows through cash-flow contributions.
Cons would be:
1. Default would be a consideration.
2. Change in tax laws.
Has anyone made a similar arrangement? Doe sanyone see any possible issues with this arrangement? I wanted to run this by the mob before I take to my CPA. The last time came to her with a creative deal she just fell out of her chair.