2 Self Directed IRA Scenarios - what are your thoughts?

[Account Closed]

I am considering moving my sizeable 401(k) from my previous employer to a Self Directed IRA or self directed 401(k) so that I can access the balance to use a down payments on rental properties. I've come up with the two following basic scenarios and would like to know if they are both feasible or not.

Scenario 1: I purchase a $200 duplex using $50k - or 25% down -  SDIRA monies and leverage the rest. After netting income each month, I portion 25% of the net income back into the SDIRA and keep the remaining 75% outside the account. Am I able to do this or does all income have to go back into the SDIRA? What is the reasoning/code describing this?

Scenario 2 (Similar): I create an individual LLC and "invest" $50k from my SDIRA into it, purchasing 25% equity. I then purchase a $200 duplex using the $50k, which is about 25% down. After netting income each month, I pay the SDIRA a dividend equal to ownership shares (about 25%). Is this doable? If not - and likely because the LLC I create may be considered a prohibited person - is it possible/legal to utilize foreign business registrations (i.e. panama)?

[Jon Holdman]

Scenario 1 - This is possible, though not exactly like you describe. Your IRA can get a loan, but it must be a full non-recourse loan where the IRA is the borrower and not you. These loans are possible, though only a small number of lenders do them. They are typically more like 35-40% down. All money into the property must be from the IRA and all money earned by the property must go back to the IRA, not you. You cannot work on the property or otherwise contribute to it. I have been advised by an attorney that managing a rental owned by my IRA would be OK, but other folks think this is not acceptable.

Scenario 2 - It is possible to create an "IRA LLC", have your IRA invest in it, then you manage the LLC. Setting one of these up is a bit complicated, so you want knowledgeable legal advice. But once you do this, the same rules still apply. Were this LLC to then buy a property with leverage the same sort of non-recourse loan would be required, you cannot work on the property, and money must come from the IRA LLC and earnings must go back to the IRA LLC.

In either scenario you absolutely cannot have the IRA provide a down payment and then you get a loan. More generally, your IRA cannot do anything that would in any way benefit you personally. Its not that the IRA or IRA LLC is a disqualified party. Rather its you that is the disqualified party. Any transaction between you and the IRA is a prohibited transaction.