SDIRA and Investing in Partnerships you have Equity In

[Justin R.]

Leaning on the BP Community once again ... this time for an SDIRA question about structuring projects to fund with SDIRA funds.

I am working on a development project with a partner that is borrowing money from private investors (myself included - I have both debt and equity in the project). It is a separate LLC with multiple members. I've read the source material on Prohibited Transactions and understand the intent of the rules - to make sure I don't benefit personally from those IRA funds. What I don't know is how a couple rules intersect. A few things I think I know:

1. It's fine to lend money from the SDIRA to a (qualified) person or entity with a simple promissory note.
2. If I control 50%+ of a partnership or entity, the SDIRA cannot lend to that entity.
3. Any money lent for a development project (which will create current income) should be structured as debt to avoid UBIT.

I want to put my IRA money to work here, and the intent of the rules would be met - only the IRA would benefit. But, I don't think the letter of the rules would be met. Couple options I see (did I get this right?):

(A) Own 49% or less of the LLC. The SDIRA can then invest in debt from the LLC without issue.

(B) Perhaps loan money to an individual. What happens if that individual turns around an invests in the LLC?

Can someone out there make me smart?

[John Woodrich]

You can't invest your SDIRA in a company that you are investing in, it does not matter if you have control of the entity or not.  It is a prohibited transaction.

You may not think you are receiving benefit with your IRA investing however you are. As Brian mentioned you have to watch out for direct or indirect benefits. You are receiving a direct cash flow benefit in the company you own and it IRA investment will presumably increase the value of the company, which will also increase the value of your personal holdings. Regardless of intent this will not work. It wouldn't surprise me if you found people doing this on here however just because you haven't been caught doesn't mean it is correct.

Lending money to an individual who is not a disqualified party may work however if that money gets invested into your company I can see the IRS unwinding the transaction and saying you are really loaning yourself the money which is also a prohibited transaction.  Especially if the partnership is kicking out the loan payments to pay off the debt.

I haven't heard anything about a direct loan to the LLC for an under 49% investor but presumably you would have the same benefit derived from an equity investment?? Doesn't smell right to me.

I personally don't see your plan working out within the rules of the law.  Call your CPA and if he is unfamiliar with the rules (many are) I would look for a specialist.  Paying $200 for a 1 hour phone call could save you thousands if the SDIRA trips and you have early withdrawal penalties, interest, etc.