Buying investment property from self using self-directed IRA?

Question

Have some funds  in a self directed IRA already that I plan to purchase property with, let's call this IRA$.

With personal cash - MY$. I intend to purchase property below market value, in cash (cash only auctions).

Using MY$, I'm still studying on the best structure to use to purchase property in this manner, but I'm assuming I'm going to be buying properties in a single-member LLC, then  transferring them into their own 1-LLC-per-property LLC's (where they would all still be a single member LLC)

So I guess my question is, could I use MY$ at auction to buy a house for $50k at auction that may have an appraised value of $100k, then have my self-directed IRA$ purchase the property (for either $50k or $100k) from "me" - even though it would be purchasing from one of my LLC's.

I'll ask my IRA custodians what they think of this tomorrow, but curious if anyone here has done this or if it is discouraged.

Jack Shea · Answer

A Checkbook Control Trust would solve the problem. You set that up with your custodian and your trustee, an independent and unrelated person who signs your checks. Your IRA is the beneficiary of the trust. The trustee sets up a bank account in your corner bank. The custodian transfers all of your funds to that bank account. You can buy at auctions, nights and weekends with no cost or delay of going through the custodian. All rents, note payments, flip proceeds etc. go to your corner bank, not the custodian. I have been using this process for over 13 years and thousands of other investors also use it. There is no LLC, annual fees, annual reports, costly operating agreement, registered agent or public record of the Trust. It costs less than $300.

Patti Robertson · Answer

@Dmitriy Fomichenko - I don't have any trouble getting checks from my custodian.  We send up a check request, and they send back a check.  I always order checks in advance of having any work done on my properties so we have it waiting when the vendor completes the job.  The same could be done to prepare for an auction.

James Miller · Answer

What you've described in your question is a clearly prohibited transaction. The SDIRA funds can never buy from you or you risk invalidating your entire SDIRA. The SDIRA needs to buy from the arms-length third party only.

Jay G. · Answer

Thanks, Jack! I'll look into this more after this next round of auctions is over. This sounds like an eaiser way. You say they've been doing it for 13 years? Was there a specific IRS publication or court decision 13 years ago that allowed for this Checkbook Control Trust product/service to exist?

Jay G. · Answer

Thanks, Patti.  Yes, recently confirmed nearly the same. Auction requires certified funds paid at day of sale, so I would have to have custodian issue multiple denominations of cashiers checks payable to the tax authority (at $35 each) and then return unused cashiers checks and purchase details (if any) to custodian directly after auction.

Easier if the auction format allows for payment within a couple days by wire transfer. Then the custodian could just pay the invoice via wire directly to the tax authority.

Account Closed · Answer

no, it is a prohibited transaction. any entity that you or an y disqualified person controls is also a 'disqualified person' for the prohibited transaction rules. Some self-directed IRAs (SDIRA) allow your IRA to invest into an LLC that you manage and that LLC can purchase its own property using qualified funds. If your SDIRA does not allow that kind of LLC investment, then your IRA can either own real estate directly in its own name or transfer to an IRA custodian that allows it. I can help with that. WHen you have personal and qualified funds invested in real estate you need to keep the transactions separate or you run the risk of your IRA being disqualified.

Dmitriy Fomichenko · Answer

@Patti Robertson, you are correct that he does not need to take a withdrawal in order to but at the auction, however, he is going to have a hard time doing so using custodial account. As he stated he needs certified funds and quickly. That is where checkbook IRA or truly self-directed Solo 401k with checkbook control comes very handy. As account holder you have the ability to control your funds with the checkbook and can get certified funds at your local bank without going to a custodian.

Patti Robertson · Answer

@Jay G. - Negative.  You don't need to do a withdrawal.  If your self-directed IRA is already set up, you just need to submit a check request - or two - or three.  I'd probably break it up into several denominations so you have downpayment options based on what the purchase price will be.  If you don't use them, just send them back.  My IRA custodian - MidAtlantic IRA - charges $5/check, as long as I don't need to put a rush request on it.

Jay G. · Answer

Thanks all for the clear explanations!  It seemed a little too good to be true, so I figured such transaction wouldn't wouldn't be allowed :)

@Patti Robertson Thanks for the tip, I did assume the IRA could buy directly at the auctions, but as you may be aware, county tax auctions are going to require certified funds (cash) of some sort - cashiers check, etc.  So I guess this would mean I would need to trigger one of those 60-day withdrawals in order to maybe make a purchase at auction.  If I didn't buy anything at auction, then that 60-day option would be used up for the year anyway (I think?).  So that is why I was asking the original question, since I assume it would be more straightforward tax wise for the IRA to purchase assets directly then to give me "cash" and have me acquire them and use up the 60-day emergency option.

Mark Nolan · Answer

@Jay G.

Such transaction is prohibited based on the following:

"Sale, exchange, or leasing of property between a plan and a disqualified person"

The plan is the IRA and the disqualified party is the LLC that you personally own.

Essentially, you cannot do indirectly what is not allowed directly--also known as roundabout transaction.

Roundabout transactions

A roundabout transaction occurs when the IRA owner  structures one or more transactions with the purpose  of knowingly or not knowingly making a prohibited transaction.

The prohibited transaction rules are further discussed in the following link:

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-prohibited-transactions

Buying investment property from self using self-directed IRA?

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