Self Directed IRA--will this work?

[Jon Klaus]

I have a potential partner and this is what we are thinking. Each of us roll traditional IRA's of the same amount of money (say $100K) into new SDIRA's. Each of us also set up new LLC's. My SDIRA lends his LLC $100K. His SDIRA lends my LLC $100K. The LLC's pay the SDIRA's 10% for the money. The LLC's invest in RE as each LLC owner sees fit.

Would we be breaking any SDIRA rules?

[Jon Holdman]

As it was explained to me by a lawyer advising me about IRA investing, any investment that provides you a personal benefit is potentially troublesome.

For example, he recommended against purchasing a house near mine using IRA money.

Having your IRA loan money to someone is not a prohibited transaction.

Having someone else use their IRA to loan you money is also not a prohibited transaction.

But this "I'll scratch your back if you scratch mine" arrangement doesn't pass the sniff test. As far as I can tell, neither transaction is a problem. But the entire arrangement could be viewed as offering benefits to you personally (and the other guy.)

I think the law is fuzzy in this area. This could well be a situation where you could get away with it. But if dragged into tax court, you could end up having to fight with the IRS about this arrangement.

If this other guy is only willing to loan you money out of his IRA if you're willing to lend him money out of yours, it could be construed as using your IRA to secure a loan for yourself.

Keep in mind the penalty if the IRS were to rule against you is severe. The entire IRA would be considered immediately distributed and taxes and penalties would be immediately due on the entire account.