Anyone sell RE to stepchild & the SDRIRA buys it from stepchild?

33 Replies

I'm thinking about selling a property I currently own to my adult stepchild (would trust with my life). I am planning to quitdeed claim the property to the stepchild (gift the stepchild closing costs needed to buy it from me), then my Self-Directed Roth IRA LLC checkbook account would immediately buy it back from the stepchild. Has anyone taken this (legal) route? How did it work out? Did the IRS not blink an eye?

@Gebson Pinheiro I see you are new here, so welcome to BP.

I and my partners all have SDIRAs and SOLO401Ks also. We use the Professionals we have found here on BP such as those who took the time to comment above and have been very happy with the service.

Our original provider said we could do a similar but different 'grey area' transaction so we did since we were new to SDIRAs. It became a pain in the *** to stay in compliance. We even consulted one of the top Self Directed Attorneys in the country, and eventually decided there are better ways and divested from that particular property. We own 9 properties this way in 2 different LLCs, one for SDIRAs and one for SOLO401Ks with 6 different accounts involved. To me, there are enough rules to follow that tip toeing into grey areas is not worth the stress, to me at least.

Where the grey are where you are concerned comes in because your wife is disqualified to you, and her child is disqualified to her. Do two negatives make a positive? I would bet money that there is likely no IRS guidance on that. I personally would not want to be the test case.

I would think there could be a bunch of grey area also in assigning a value to you selling/gifting it to them, and then them selling/gifting it to you also.

What is the main goal in going this route? Would there be a reason not to simply look for another property to buy with your SDIRA?

IF you are really set on this, I would consult a good attorney in this area such as KKOS Lawyers / Mark Kohler's Office, or I think here on BP  I believe @George Blower is in this space and possibly a couple of others.

Dan Dietz

@Gebson Pinheiro

There is no doubt whatsover that what you are considering is a self-dealing prohibited transaction. If you want to call it "opinion" and go torch your IRA, feel free to do so. I will not be insulted but you will be a lot poorer.

What you propose is not legal and it is not even a touch gray at all. It is 100% a no-go. You have two experts with decades of combined experience in the space telling you so. The IRS would view your stepson as a straw man in the transaction between the IRA and yourself.

Your stepson is not a disqualified party. That is all the article you reference notes. It does not support your proposed transaction in any way. You are a disqualified party to the IRA, and any direct or indirect transaction between the IRA and you is clearly prohibited.

@Gebson Pinheiro

The compliance risk is clear - what you describe is a prohibited “step” transaction. The intervening “step” of selling to your adult stepchild would be ignored and the transaction would be analyzed as a transaction between you and your retirement account. Since no exception to the prohibited transaction rules allow the transaction it is prohibited.

I suppose it comes down to the following question: How lucky do you feel?

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@Gebson Pinheiro

Given the obligation to report alternative investments held in IRA accounts (https://www.irs.gov/retirement-plans/asset-information-reporting-codes-for-form-5498) and the title records for real estate investments, detecting this transaction would be easy.

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@Gebson Pinheiro

Knowingly violating the law hoping you won't get caught because IRS is "too busy" would be very unwise. You will not succeed with this strategy long term. About 3000 years ago, King Solomon who is not only the wisest person ever lived, but also the richest said:

“Steady plodding brings prosperity, hasty speculation brings poverty”

This is just as true now as it was then. You came on this forum seeking advice, it has been given to you, heed it, be wise!

Clearly the step transaction doctrine would tear this apart.  You may find someone who has done this but it doesn't mean it is correct.  And when they find out you posted about your tax evasion online they will have no problem handing out penalties.

@Gebson Pinheiro

No one on here is going to advise you to break the law.

Everything you've documented in this thread thus far, and on a public forum at that, would lead a reasonable person to believe the incorrect tax implementation goes beyond negligence into fraud.

There is no statute of limitations on a fraudulent tax return...

Everyone breaks the law.  Everyone who's posted here has broken the law, so let's not go pointing fingers.  If you drove 1 mile over the speed limit, you've broken the law.  The question is not whether or not this is legal, because it's a gray area (such as "keeping up with the pace of traffic" in some states).  The question is how often does the federal government chase after a small fry like me performing a step transaction just trying to not run out of money in retirement.

@Daniel Dietz - I appreciate the help, brother!  I have about half a million dollars in properties that I've been using for rental income, and I want to try to "buy" that with my SDIRA.  I guess if worst comes to worst, I can just keep the cash flow going into retirement, but having 85% of my social security taxed isn't something I'm looking forward to.  Well, at least I'll be in a lower tax bracket.

Originally posted by @Gebson Pinheiro :

Everyone breaks the law.  Everyone who's posted here has broken the law, so let's not go pointing fingers.  If you drove 1 mile over the speed limit, you've broken the law.  The question is not whether or not this is legal, because it's a gray area (such as "keeping up with the pace of traffic" in some states).  The question is how often does the federal government chase after a small fry like me performing a step transaction just trying to not run out of money in retirement.

K , keep this in mind though. 

What Al Capone went to prison for was Tax Evasion.

So of all the law breaking- this is what he was nailed for. 

And again- every part of what you're suggesting is reported, so there's no hiding it. And the second answer is there come after it regularly. Plus you're just telling us you're doing it here publicly. And the IRS has whistle blower reporting. 

So may the odds be ever in your favor I guess. 

 

Originally posted by @Gebson Pinheiro :

@Daniel Dietz - I appreciate the help, brother!  I have about half a million dollars in properties that I've been using for rental income, and I want to try to "buy" that with my SDIRA.  I guess if worst comes to worst, I can just keep the cash flow going into retirement, but having 85% of my social security taxed isn't something I'm looking forward to.  Well, at least I'll be in a lower tax bracket.



Not sure how having these properties in a sdira would save you money.  

If you own them free & clear, I think equity stripping would be a better (and legal) route to explore.  What am I missing?

 

@Natalie Kolodij - you've actually strengthened my argument.  They went after Capone for tax evasion because he was a high-visibility mobster, not because the Federal government had a systematic procedure in place to look for income reporting irregularities.  Again, what I am proposing is not illegal, as a stepchild is not considered a disqualified person.  My stepchild actually owes me about $100k anyway because I paid for college, so the step transaction can be viably explained.  The step transaction doctrine has only been used by the federal government when going after the mob, foreign company puppets, and SEC-investigated major corporations; I have never seen it used against a small investor.

@Gebson Pinheiro , For just a moment, let’s say you could do what you are trying to do.  Where is the savings?  Your ira would distribute cashflow to you in the same amount you are receiving today.  How does that help you avoid your SS being taxed?

You would also have to reclaim your depreciation expense & pay tax.  That could be significant, depending on how long you’ve owned the property.

@Gebson Pinheiro , ROTH.  Ok.  I may have missed that part in the original post.

Why not just go out and buy other properties with your ROTH?  

If you do that, equity strip the personally held, you can avoid all the tax & have a wad of cash.  Since you are not wanting 'personal' income, that could be an option.

"equity strip the personally held, you can avoid all the tax & have a wad of cash"

@Alan Grobmeier - What would I do with that cash? I want recurring income, not a one-time pull out. Getting a HELOC to pull out that equity incurs a monthly repayment of that loan, which would decrease my monthly cash flow, not increase it.

"Why not just go out and buy other properties with your ROTH?"

Because the cash flow income from my current properties would still put me over the $32k limit, which would trigger 85% of my Social Security benefits being taxed.

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