Making a private loan out of SDIRA to the buyer of a property I own

[Jean G.]

Hello,

I have an interesting idea to deploy funds from my self directed IRA (SDIRA) into mortgage notes, which I determined is a good way to invest my IRA funds.

I understand that I am not allowed to lend funds from the SDIRA to myself, as I am a related party and this would be a prohibited transaction. I am also not able to have the SDIRA buy a house (or invest into a house) that I own, for the same reason.

However I am looking for advice as to whether the following transaction would be prohibited or not:

I (directly, not through my IRA) purchased a property at 65% of market value, and I am now thinking of selling it with owner financing, in order to create a mortgage note for my SDIRA. I would go and sell the property on the open market to a legitimate and unrelated third party who in turn would take a private mortgage from my SDIRA to pay for the property.

The SDIRA would not be giving me money, it would be loaning money to a legitimate 3rd party who would use these funds to purchase a property from me. But even though there is a title company and escrow account involved, the same funds that the buyer would loan from my IRA would eventually get released to me by the title company when the escrow closes.

What do you guys think about this? Has this been done before? Is it too risky and grey?

Thank you!

Jean

[Jeff Rabinowitz]

This is not grey at all--it is a prohibited transaction. A good rule of thumb when dealing with your SD IRA is if you have any suspicion whether the transaction might be prohibited--Don't Do It. This is not like being aggressive on your taxes. Upon audit an aggressive tax stance might be disallowed and if so you would be required to pay the tax you owe plus interest and a fairly small penalty. That makes being aggressive a good strategy. With the SD IRA, if a transaction is found to be prohibited you will be required to distribute the IRA from the point the transaction was made. You will have to pay the taxes and a penalty (depending on your age) but the SD IRA will no longer exist. The penalty is too severe to risk being clever.