Real Estate Investor · State College , PA · Member since 2009 · 594 posts · 173 votes
Would like the to understand if I can find a friend to invest in my company, while I invest in their company. Both of us using our self directed IRA. Loan amount of 200k. The way I see it, even they get into trouble and can't pay me back, I would still have their 200k. Or on the flip, if I got into trouble and could not pay it back. They would have my 200k. So in that sense it would be a secure loan. How would the IRS feel about such a relationship. If we both have real, working businesses and all is written up by the lawyers giving a reasonable rate, would it fly? Seems so much more free than trying to invest within a IRA.
This is called reciprocal lending and is considered a prohibited transaction. Basically your company and his company need money - instead of taking a taxable distribution from your own IRAs to infuse cash into your own respective companies, you are cross-lending to each other to accomplish the same end, which results in the personal benefit of infusion of cash into your company - without a taxable event to you -and a loan that you or he don't necessarily have to pay back. The point of IRA investing is to grow IRA wealth, not have any personal benefit.
This is called reciprocal lending and is considered a prohibited transaction. Basically your company and his company need money - instead of taking a taxable distribution from your own IRAs to infuse cash into your own respective companies, you are cross-lending to each other to accomplish the same end, which results in the personal benefit of infusion of cash into your company - without a taxable event to you -and a loan that you or he don't necessarily have to pay back. The point of IRA investing is to grow IRA wealth, not have any personal benefit.
You know what they say when something seems too good to be true...Look at it as less of a shoot down and more of a tax court/IRS audit avoidance tip! Have a good one.