Q: Taking assignment of a tax lien in a sdIRA.

Paul Gold · 2013-10-16T19:05:20-07:00

Hi all, hope you are well this evening. Considering the following scenarios and would like opinions about whether the IRS would consider them allowable transactions, please. My brother and I each have our own portfolio of IL tax lien certificates, completely independent of each other. There is absolutely no common ownership. The tax liens are purchased directly from the County. If it does not redeem, we file a petition in court a couple years later asking the judge to issue a tax deed. At the time of the auction one can not know which certificates will become deeds. There is a decent profit potential for those that do become deeds. What we would like to do is to have my sdRothIRA purchase some of those older liens that are about to become deeds from my brother's portfolio. His sdRothIRA would do the same from my portfolio. Essentially only cherry-picking the good stuff. The sdRothIRAs would quickly flip the properties. The gain would be taken into the Roth, tax free. Interested on thoughts on whether this would be an allowable transaction? Thanks! A variation we discussed is to individually go to deed personally, then have the sdRothIRA buy an option to purchase (the price being some figure slightly above the after-rehab hard dollar cost) on or before some specified future date. Then we would find an arms length buyer and have two closing on the same day. The sdRothIRA buying from the brother, and that sdRothIRA selling to the new buyer. Again, the gain would be taken in the sdRothIRA, tax free. These are pretty blatant moves to take the gains into the sdRothIRA, yet they seem to conform to the rules of the game. Are we missing something? Thank you!!

Jerry K.

Specialist · Phoenix, AZ · Member since 2011 · 698 posts · 629 votes

12y

@Paul Gold Wouldn't it be great to be able to do those deals? Unfortunately the IRS looks on all of those as "self-dealing". Yes, even when you buy your brother's liens and he buys yours.

From the Journal of Accountancy:

SELF-DEALING, OR ENGAGING IN A PROHIBITED transaction, can taint any IRA transaction. Transactions must be made at arm's length and not involve the IRA owner or a member of his or her family. To avoid such problems, the CPA should emphasize investments for which established markets already exist.

Journal of Accountancy "Do's and Don'ts"

Man I would be doing these deals all the time if it weren't for those meddling kids (IRS).

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Paul Gold

OP

Chicago, IL · Member since 2013 · 4 posts · 0 votes

12y

Hi Jerry,

Thanks for the reply. Respectfully, I do not believe that is correct. The IRS is very specific as to which family members are a Disqualified Person. Ancestors and lineal descendants and their spouses are prohibited. No spouses, grandparents, parents, kids, grandkids, or their spouses.

Each custodian and attorney (with an sdIRA specialty) I've spoke to has stated that brothers, uncles, cousins, etc are permitted parties with whom to deal. One of the attorneys did not like the specific ideas described above because he thought it may cause future IRS tax/legal problems. Two other attorneys and every custodian blessed the idea. The attorney who balked did not like the idea irrespective of that fact that it involved a brother. So I do not know how to proceed…

From the IRS website; emphasis added:

Prohibited Transactions in an IRA

Generally, a prohibited transaction is any improper use of an IRA account or annuity by the IRA owner, his or her beneficiary or any disqualified person.

Disqualified persons include the IRA owner's fiduciary and members of his or her family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---Prohibited-Transactions

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Jerry K.

Specialist · Phoenix, AZ · Member since 2011 · 698 posts · 629 votes

12y

Ok, I stand corrected. I went through the IRS docs and I looked up the IRS definitions of (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant) and it does seem to allow a deal with the brother or sister of the IRA owner.

(When will I learn to shut my uneducated big mouth?) Thanks for the lesson @Paul Gold.

I'll leave it to the CPA's from this point. @Steven Hamilton II ?

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Ned CareyPro Member

Moderator

Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes

12y

I am not a CPA but I will but in anyway :-)

Reports are that the IRS is going after SDIRAs looking for prohibited transactions. While brother to brother may not be prohibited as self dealing per se, it could be interpreted as a Quid Pro Quo deal to get around self dealing rules. Since you cannot put your own liens in your IRA you make a deal with your brother to trade. Not sure I would want to go there. - @Steven H????

- Ned

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Chris Weiler

Flipper/Rehabber · Anaheim, CA · Member since 2010 · 188 posts · 118 votes

12y

I think I'm missing something. Why in your example would your IRA have to purchase from your brothers IRA? Since you both have similar portfolios, why aren't you just flipping old liens that turn into deeds directly from your own portfolio?

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Steven Hamilton IIPro Member

Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes

12y

Originally posted by Chris Weiler:

I think I'm missing something. Why in your example would your IRA have to purchase from your brothers IRA? Since you both have similar portfolios, why aren't you just flipping old liens that turn into deeds directly from your own portfolio?

Sounds to me like the intent is to purchase from the brother.

It is a borderline transaction. It is a pretty gray area. Although it is allowed. I'd be careful doing too much of it as it could be seen as going around the prohibited transactions.

[email protected]224-381-2660

1 Reply

Paul Gold

OP

Chicago, IL · Member since 2013 · 4 posts · 0 votes

12y

Thanks, guys. Not what I was hoping to hear, but no surprise. As stated in the original post, this is a blatant attempt to take gains into our Roths. We are new to the sdIRA world and were hoping to hear from some experienced investors. Coming in blind it is hard to determine how lenient the IRS is with sdIRAs.

@Ned Carey Yesterday I spoke to an additional custodian who also raised the quid pro quo issue. His take was that the IRS goofed by not including siblings as disqualified parties and uses QPQuo to make up for that error. Certainly seems logical. Thank you!

@Chris Weiler The IRS is clear that an IRA holder cannot deal with themselves, but they do permit one to deal with their siblings.

@ Steven Hamilton II Gray area exactly! Guess the question is would we want to expose ourselves to the possibility of being the guinea pigs who get this area defined… I think not. Thank you!

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Chris Weiler

Flipper/Rehabber · Anaheim, CA · Member since 2010 · 188 posts · 118 votes

12y

OK, I see my disconnect. I incorrectly assumed you were buying the liens originally in your sdIRA. Instead you and your brother are purchasing liens outside your IRA and later purchasing choice liens from your brother using your IRA. I agree with the posts above, although this is not self-dealing I would be somewhat concerned with Quid Pro Quo if you and your brother expect to do relatively equal exchanges. Although this is somewhat grey, I would consider the risks likely worth the reward. Good Luck!

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Q: Taking assignment of a tax lien in a sdIRA.

Q: Taking assignment of a tax lien in a sdIRA.

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