Partnering with someone else's Self-Directed IRA

[Jeremy Rotert]

Greetings All!

I am working with a former client for whom I assisted as their Realtor, selling a rental property for them while they live out of state.  This client was very pleased with my assistance, and has now expressed an interest in allowing me to utilize their SDIRA in some flipping projects.

I am an avid wholesaler, and flip when the deals are right for me. But, I've never partnered with an SDIRA before. Can any of you help me with examples of an agreement or contract specific for this purpose? What does an agreement look like for JV flip projects? Is it a better option to have an agreement for an interest percentage instead of a JV split of profits in this scenario?

[Dmitriy Fomichenko]

@Jeremy Rotert

It would be better for your client, who is using his IRA funds, to act as a lender on this deal. This way IRA's involvement is completely passive, you can agree on the terms (interest, points, etc.) and all of the income/gains for the IRA will be sheltered from taxes.

According to the IRS rules if tax-exempt entity (an IRA in this example) receives income from an active trade or business (which would probably be the case if you JV instead), such income would be subject to Unrelated Business Income Tax. IRA would be responsible for this tax.

Be sure to have your client consult with qualified tax professional if you decide to go JV route.