Husband and Wife each have their own SDIRA

7 Replies

I've already contacted 2 custodians on this matter and one says it's ok and the other says contact a CPA or lawyer. I've reached out to both but figured I'd ask here too.  I know it's a confusing subject so I'll try to illustrate it below. We haven't done this yet, just trying to make sure we don't do anything that is considered a prohibited transaction.

A) Brother's SDIRA and Sister's SDIRA buy rental property A together. This is not a prohibited transaction. 

B) Brother's SDIRA and Brother-in-Laws (Sister's husband) SDIRA buy rental property B together. This is not a prohibited transaction.

I know that we can do either A or B alone and it would be ok. But the question is can we do both A and B as long as the husband and wife's SDIRA's are not involved in the same property together with the brother's SDIRA?

My understanding is that almost anyone can partner on a deal. You can even partner with you and your IRA. You just have to keep everything split equally based on the level of investment. There are prohibited transactions to keep in mind and be aware of.

The scenarios you mention is a SDIRA partnering with another SDIRA these are seperate entities from the owners of the SDIRA.

This is an interesting scenario and I can understand why custodians would give you two different answers. You can talk to many different IRA attorney's and CPA's on this topic and they are all going to have different answers based upon their view points.

What I can tell you is that this isn't what would be considered the "low hanging fruit." This would not be the types of prohibited transaction the IRS would be looking for and that is because it is not blatantly prohibited. Based upon our interpretations of tax code, this is what could be considered a grey area. So if the IRS is auditing you for this, they are probably going after you for something else as well. 

This is an interesting scenario and I can understand why custodians would give you two different answers. You can talk to many different IRA attorney's and CPA's on this topic and they are all going to have different answers based upon their view points.

What I can tell you is that this isn't what would be considered the "low hanging fruit." This would not be the types of prohibited transaction the IRS would be looking for and that is because it is not blatantly prohibited. Based upon our interpretations of tax code, this is what could be considered a grey area. So if the IRS is auditing you for this, they are probably going after you for something else as well. 

@Mike Kirby

On the surface it appears that two separate transactions like you described should be OK. But to get an accurate assessment each transaction should be analyzed in greater details. 

Some considerations: problems could arise from partnerships, especially with relatives. It is best to avoid a partnership like this. Instead of deploying amount A to partner with sister's IRA and amount B to partner with brother-in-law IRA, why not pull those funds together (amount A + amount B) and find an investment you can afford on your own?... keep things simple!

Originally posted by @John Underwood :

My understanding is that almost anyone can partner on a deal. You can even partner with you and your IRA. You just have to keep everything split equally based on the level of investment. There are prohibited transactions to keep in mind and be aware of.

Not quite... In fact, partnering with your IRA can be considered a "prohibited transaction" in many cases. You are considered to be "disqualified person" to your IRA. IRS rules prohibited any direct or indirect benefit for such person from his/her retirement account, and as such you are not allowed to furnish any service, goods or facilities to your 401k:

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

While in some instances it might be possible to get into an investment together with a disqualified person you must be very careful! In my experience dealing with thousands of clients and reviewing many potential transactions involving disqualified person the end result was a prohibited transaction. You also must remember that while in the beginning transaction might be structured in compliance with the rules there is always likelihood of it leading to prohibited transaction in the future because of disqualified person's involvement.

Once you have your personal funds and IRA funds in the same deal you are now opening a "can of worms" and the burden falls on you as the tax payer to proof that there are no personal benefits from your use of the IRA funds, and IRA did not benefit from the use of your personal funds. In most cases that is exactly why the IRA account holder wanted to partner. I would recommend agains it!