Warning: Investing in Real Estate with a Self-Directed IRA

[Dmitriy Fomichenko]

I just had a consultation with someone who has the following story. Classic example of a prohibited transaction. Sometimes I hear arguments against "checkbook control" that custodian is there to protect your IRA and prevent a prohibited transaction. Well, the truth is: custodian will not protect you; you are 100% responsible for violating the rules and you better understand the rules before engaging in a transaction. Here is the story, what do you think?

My wife and I each have a Self-Directed IRA that we would like to roll over into Solo 401k. However, we have a current situation with the investment.

We each opened a Self-Directed IRA with Equity trust last fall. My wife funded hers with $5,000 from a previous employer 401k and mine $50,000 from a traditional IRA.

We used that total $55,000 to loan money to a company “ABC LLC” with the owner being a friend of ours. “ABC LLC” purchased an investment property for $55,000 with a promissory note and a trust deed to our IRAs for monthly payments with interest. “ABC LLC” was supposed to fix the property up and then flip for sale and pay us back the original investment plus any final interest.

We soon found out that “ABC LLC” didn’t have the funds to fix the property up and never paid us the monthly payments. My wife personally got a loan from a private lender to begin remodeling and getting the property ready for sale.

We are currently trying to sell the property in order to pay off the private lender and then put the original investment back into our Equity Trust Accounts. We don’t think that we’ll make any gains on the sale but if we do,I assume the net gain will go 90% to my Equity Trust account and 10% to my wife’s Equity Trust account?

We hope to clean up this situation in order to get the Equity Trust IRA accounts made whole again with the original investments so that we can close these accounts and roll the funds into the solo 401k plan.