How to partner with your SD IRA to construct a deal?

Question

Hello BP,

I recently came across a deal. The property is in the suburb area of Baltimore County, Maryland. The deal requires all cash and since we don't have that much cash on hand, I am thinking of partnering my LLC, and self-directed IRA accounts from my mother, wife and my old 401k. I heard there are a lot of restrictions but I am interested in trying it out for the first time. Here is the breakdown of the deal, would you provide your opinion on this?

• Partner 1: my own Self Direct IRA LLC (out of state LLC, somewhere low cost)
• Partner 2: my wife's Self Direct IRA LLC (out of state LLC, somewhere low cost)
• Partner 3: my mother's Self Direct IRA LLC (out of state LLC, somewhere low cost)
• Partner 4: an LLC that is owned by both my wife and me.

Partner 1-4 contribute funds to a Maryland LLC to title the property.

Has anyone done deals like this before? Would you mind sharing how you construct a real estate deal? Would my planning violate any IRS rules for self-directed IRA? The only thing I am not sure about is my LLC is owned by me and my wife.

Thank you very much.

Yibing

Phil G. · Answer

Personally, I would steer clear of this type of transaction.  While disqualified parties can invest together if done properly, the real risk you run is having the IRS rule the transaction as self-dealing.  Since you don't have the capital to do the deal without the IRAs to supplement your capital, your IRA is enabling you to make the transaction and personally gaining by the IRA's involvement in the transaction.

Brian Eastman · Answer

@YiBing T.

What you are proposing is possible based on the interpretation of many tax attorneys, as outlined by @ George, but there is still some layer of risk if there is any perceived benefit between any of those plans. George also neglected to mention the potential issues of exit strategy that exist if one partner wants out or passes away.  That can get real messy real fast in the IRA space when disqualified parties are involved.

My bigger question is one of why?  A deal this complex better produce inordinately high return in order to justify the expense, complexity, rigidity, and risk.  You are also putting multi-generational family savings into one investment.  That is risky in itself.

It would seem a lot wiser to take those individual retirement plans and invest them into something they can each do independently such as smaller properties, trust deeds, crowdfunds focused on real estate based assets, or the like.

Dmitriy Fomichenko · Answer

@YiBing T.

I totally agree with @Phil G. What you propose is not going to work! You, your wife and your mother are all considered to be "disqualified" to your IRA. IRS rules are very clear: you can't receive any benefits from your IRA nor can you or any other disqualified person can benefit the IRA in any way. See the rules for yourself:

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

I understand that this is probably not what you want to hear and you will hear all kinds of answers on the internet, but please be aware of the risk having your IRA, your wife's IRA and your mother's IRA disqualified.

George Blower · Answer

@YiBing T.

I've come across such transaction where:

• All investors including both spouses pool their IRA funds in the same LLC. 
• No debt is used.
• The LLC is capitalized by all IRAs at the same time and not further LLC units are purchased by any of the IRAs once funded.

John-David Herlihy · Answer

I am not an expert in this field, but it seems to me this would be a disqualifying transaction. If it is by chance technically “OK”, it appears to me to be skirting the intent of the regulations around disqualified persons.

Who’s name would the 5th Maryland LLC be in? If it is a lineal descendant I believe that would be the major determinant.

How to partner with your SD IRA to construct a deal?

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