Been reading a lot about SDIRA and real estate investing, including several posts on BP, but this question I couldn't find an answer to..
Say I form a project LLC with three friends to flip a house. The ownership is split based on our capital contributions, 33% each.
Can my SDIRA LLC lend money to the project LLC without any issue? I read in a few places that there is an issue if I'm a 50% or greater owner in the project LLC that the SDIRA is lending to. Will being a minority owner make this scenario OK?
To be more specific: the project LLC obtains a first lien on the house through traditional financing. The SDIRA lends working capital to do construction/rehab...so basically a construction loan; when the house is sold, SDIRA gets a balloon payment in the entire balance plus interest.
@Jack Okada I'm sure some of the professional SDIRA people will jump in here, but I'm under the impression that even if you owned 1% of it, your IRA lending money to it would be a prohibited transaction.
This doesnt apply? Source:https://www.theentrustgroup.co...
See the bit about 50% owner at the bottom...
Question: Who is a disqualified person?
Answer: For the purposes of determining prohibited transactions through your self-directed IRA, the following people are considered disqualified persons:
- You and your spouse
- Your employer
- Your lineal ascendants and descendants, as well as their spouses (children, parents, etc.)
- Any person providing plan-related services (custodians, advisors, fiduciaries, administrators, etc.)
- Any entity (business, corporation, partnership, etc.) of which you are at least 50 percent owner, whether directly or indirectly
Hi @Jack Okada , other than the "black and white" prohibited transaction rules, there are several grey areas.
One thing that you always want to keep in mind is who is benefiting from this IRA investment. If you, or anyone else who is disqualified to your IRA receives any sort of direct or indirect personal benefit from your IRA investment, it would very likely still be seen as a prohibited transaction. If you are using your IRA to invest or loan money to an LLC in which you own, control, manage, or are highly compensated by, even if you are not a majority owner, I would say that it could very easily be argued that you are still receiving some sort of personal direct or indirect benefit, which would still make this a prohibited transaction. If you have any other questions, I would definitely be more than happy to help answer them for you!
Hayley is correct. Per your analysis, the LLC itself would not be a disqualified person to the IRA.
You still are a disqualified person, however, and if a LLC that you participate in transacts with your IRA, you are receiving a benefit and/or creating an indirect transaction between yourself and the IRA. This would not be a good transaction to pursue.
Thanks for the responses guys!
Percent ownership and company control must be considered. Read Rollins Vs. the IRS. I would structure it a different way and not do it as you suggest. Many ways to skin a cat and structure a deal.
Jack, late post, but chiming in.
We recently had transaction in Houston get rejected by SDIRA operator because the LLC (purchase entity) also owned part of the final funding through SDIRA.
The SDIRA operator actually approved it at first...but realized the last 45 minutes before closing it was against their policy. Funding was resolved last minute, literally.
I would stress the importance of having alignment with SDIRA operator first.