80 Unit Multifamily partnership and SDIRA

12 Replies

Checking to see if the following would be permitted under SDIRA investment, using an 80 unit complex as example. I have a solid albeit general understanding of SDIRA and disqualified parties etc. I do have a SDIRA set up which is funded via the an IRA owned LLC. Please consider:

  • Looking to partner with 2 other individuals (no family connection whatsoever) on an 80 unit multifamily -- party A being my SDIRA LLC
  • Each party will contribute 1/3 of the required funds and have 1/3 ownership---this is not a syndication but a partnership
  • Balance financed via non-recourse agency debt with one of the other partners being the Sponsor 
  • Property would be purchased under a separate LLC with equal ownership
  • My contribution would be made not from me but from my IRA LLC -- not sure if this would be a loan to the joint ownership LLC or my SDIRA would need to be on title
  • Normally a deal like this could and in this case would be structured with a couple of additional expense items:
    • An acquisition fee and potentially a disposition fee upon sale say 1.5% to the individual putting the purchase or sale deal together
    • An asset management fee (this is not a property management fee but more of an administration / manage the manager fee)
  • These fees typically go to a designated member and/or the person that puts the deal together (me) but technically I suppose it could go to another 3rd party -- it is not part of the asset value they are expenses 

So my questions:

  1. Can I be the designated person to oversee and collect these fees?
  2. If so, would I be able to collect fees personally or does this also need to go back to my SDIRA?
  3. If I can be this designated person but funds need to channel back to the SDIRA does it have to be 100% or can I take 1/3 (since this is the SDIRA's percentage of ownership) send that back to my SDIRA and keep balance directly?

Under a normal 100% SDIRA deal I fairly certain I can't be involved in the day to day management and/or swing a hammer for rehab etc but I can be the one who designates which Property Management company and/or contractor to engage...seems to me this is the same thing; however, due to the size of asset and effort required for managing the partnership it is significantly more involved --   I really don't want to do this without some sort of compensation either directly or back into the SDIRA.

Appreciate your thoughts  --  Bernie

I'll wait for the CPA's and lawyers to chime in, but in my eyes that seems perfectly kosher and you could collect the fees as yourself (not SDIRA). You would be the sponsor on the deal, while youre SDIRA LLC would be an investor.

Let's see what others say.

@Kon Zel - that's incorrect.

@Bernie Huckestein - you are considered to be "Disqualified Person" to your IRA. IRS rules are very clear: you are not allowed to provide any services to your IRA nor receive any personal benefit from the IRA. Study this:

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

While you can invest in this deal with other partners, you personally can not be the manager, sponsor (or however else you want to call it).

SDIRAs for real estate are not for the "fly by the seat of pants" style person. (Not accusing anyone of that.) This is because the potential tax risks are huge since something as simple as buying a candy bar for yourself with SDIRA funds can make the *entire* SDIRA immediately taxable.

@Bernie Huckestein

You can manage the LLC but you cannot receive compensation for doing so.

It may be best just to perform this particular transaction under one LLC whereby all members including your IRA will be the listed members. I would also consider setting up a separate LLC for just this deal to streamline things.

Bernie,

I disagree with George here: managing an asset like this would be considered service. Not sure why he gave you OK on this, as retirement account attorney he should know better, perhaps he misunderstood your question... Would not be an issue if it was a single family rental, but 80-unit apartment building is very different story. This would be job of a syndicator or asset manager. As you mention this in your summary, you understand the amount of labor this would involve. It doesn't make sense to do it for free, but even if you agreed to do it for free - that would violate IRS rules so you can't do that. Again, review the link I referenced in my earlier post: providing services is not allowed per IRS. 

I would also consider doing such a deal, also using my ira, but I wouldn’t be expecting to be able to pull a fee from operating. Especially with 2 other partners, it would be best to have an outside asset management company be the go to, and have those fees accounted for. Best to have a neutral party for that, even if it’s rules allowed for one of the investors to pull a fee.

Dmitriy,

Am I right that revenue earned by the borrowed money is also taxable?  This is a very confusing part of the tax law, with expensive consequences.

My assumption was that his share of the property was to remain in the SDIRA, as would the income until he was able to withdraw.

Originally posted by @Alan Majors :

Dmitriy,

Am I right that revenue earned by the borrowed money is also taxable?  This is a very confusing part of the tax law, with expensive consequences.

Yes, but if I buy an asset in my 401k with leverage, Uncle will tax the portion of income that is related to the leverage.  This is too complicated for me due to the partnership, but I'd want a tax person to sign off on the strategy.