Commingling funds

[Julian Buick]

If I make a loan through my SDIRA to an LLC for a fix and flip, can I also make a loan to the same LLC using my private funds? Or is that not allowed? The LLC would manage the whole rehab. I would have no involvement whatsoever apart from providing funding. The loans would be paid back with interest at closing. There would be no equity position received.

[Brian Eastman]

@Julian Buick

This is a tricky question, and one to which you will likely get different opinions based on who you talk to.

The IRS is not specific on this issue, and there is not any case law that we know of you can rely on for guidance.

The key premise with the IRA is that there can be no direct or indirect benefit between the IRA and a disqualified party - in either direction.

Many tax professionals are comfortable with the idea of joint venturing between IRA and personal funds, so long as:

• The investment is entered into jointly on day one (you cannot sell or exchange interest between the parties).
• The initial equity percentage is maintained throughout the life of the transaction, so if you initially fund 50/50 or 70/30 or whatever, you stick with that.

The caveat is that in order to avoid any kind of "indirect" benefit, neither party should be enabled to participate in the transaction due to the presence of the disqualified funds. If you wish to fund a $100K note and have plenty of resources personally but only $20K in your IRA, how would the IRA have funded that note? Is the IRA receiving a benefit by being able to participate in the note deal that might not have been available to it unless it could piggy-back the $80K lent personally? I think you can see where this might become an issue if the IRS decided to take a close look.

With property transactions, this type of joint venture is more common. The idea there is that if the IRA has enough resources to purchase the property using a non-recourse mortgage, it is capable of funding the transaction in stand-alone mode and therefore is not receiving any benefit from the access to funds of a disqualified party as a JV partner. (Similar logic could be applied on the personal funds side as well). Since most private note lenders cannot borrow the funds to make those loans, however, this same concept would likely not translate to a note investment.

... and frankly, there are a lot of folks out there who just say "sure, so long as you keep everything property allocated, there is no problem."  Bottom line is that there is risk, and how seriously you take that risk boils down to a conversation you should have with your licensed tax or legal counsel.