Options for Partnering with a SDIRA?

Question

Hello,

This is kind of an 'expansion' of another question I posted earlier here.

I was hoping to use Non-Recourse loans to use within my ROTH to achieve 50% leverage. I am finding that the lenders I have contacted are not interested in lending on things that are pre-1940, over/under duplexes (2 story house converted) or under 100K sale price..... which are what I am seeing as the best deals here where I live.

I think I understand the rules where *I* can not (nor any other disqualified person) do any kind of personal guarantee on the 'non IRA' 50% share.

So my question is, what are the other options for that share that is not the IRA share? Some thoughts would be;

1) Me getting a Non-Recourse Loan from a private individual who is NOT a disqualified person. This could be either cash from their SDIRA or their cash on hand.

2) Having a non disqualified person join as a partner who would use a loan of their choosing outside of an IRA to be a 50% stake holder.

3) IF I could find someone that would sell on a Land Contract that would not require a 'personal guarantee', could my  SDIRA do say a 50% (or less if possible) down payment and have them carry the remainder on the LC?

Other thoughts?

Thanks, Dan Dietz

Matt Devincenzo · Answer

1) Yes you could possibly do this, but then they could also just lend to your IRA directly so that it had the full ownership. That would be preferable IMO because it eliminates any future issues with dealing with the split ownership later.

2) I think your partner will have trouble getting a loan because the lender will not want to lend on a partial ownership. Reason being if your partner defaults and the bank forecloses they can't foreclose on your ortion of the property, or it at least greatly complicates things.

You can actually partner with a disqualified person with the split ownership as long as you do it from the start. You are a disqualified person to your IRA but can still partner with your IRA and that same logic extends to other disqualified persons. So your IRA and your Mom's IRA say could own 50-50. The difficulty here is you have to split everything forever until you sell. So if you want to sell to get into another investment you both have to be on the same page.

This is a paragraph from the IRS dealing with disqualified persons: Certain transactions are exempt from being treated as prohibited transactions. For example, a prohibited transaction does not take place if a disqualified person receives a benefit to which he or she is entitled as a plan participant or beneficiary. However, the benefit must be figured and paid under the same terms as for all other participants and beneficiaries.

And yes I have done the partnership aspect and it passed the plan administrator's review as well. Again you must start with the partnership from the beginning and continue to split everything and then it will be ok. But again you now have a 2nd decision maker to deal with on everything from expenses( do we upgrade the kitchen or not) to sale, if one is still interested in the cashflow and the other wants to sell and get a new asset you will need to come to an agreement before you can do anything.

Daniel Dietz · Answer

Matt,

Thanks for the quick response.

As to #1)

We will be holding the property in an LLC. Would a private person lend to the IRA, or the LLC?  My understanding is that a traditional 'Bank Non Recourse' loan would be to the LLC that hold the property and would therefor be in a position to foreclose if needed in order to secure their equity. Would a private lender do things similarly typically? Would you see any other pluses or minuses to lending to either the IRA or the LLC?

As to #2)

What I envisioned is an individual who would either us a HELOC, or other type of equity loan where they could use the proceeds for whatever they chose. Does that make sense?

Thanks, Dan