Investor · Jefferson City, MO · Member since 2013 · 309 posts · 100 votes
I would like to purchase a lower value performing note within my SDIRA but would like to partner with a fellow investor who does not have an IRA. Example: Performing note, $15,000 paying 15% interest only then paying remaining balance after 1 year. My fellow investor is OK with a 9% return and will invest $10,000, I will invest $5000. I will get 15% interest only payment for the $5000 that I invested returned to my SDIRA and my investor will get 9% interest only for their $10,000 and I will keep the remaining 6% interest on their $10,000 for finding the deal.
What is the best way to structure this deal within my IRA? Am I better off borrowing the $10,000 from my investor and paying them back at 9% interest only then paying off their $10,000 at the end of the year when the note pays off or am I better creating a JV situation? LLC? What are the pros and cons of each? Is there a better way to structure the deal so I am not paying UBIT or debt financing within my SDIRA?
@Sandy Uhlmann Just set up a multi-member LLC. Your partner will be one member and your IRA will the the other member. Be sure your IRA custodian is involved to be sure that your IRA name is correct. For instance: New Direction IRA, FBO Sandy Uhlmann
Sandy Uhlmann follow exactly what Todd Dexheimer mentioned. Don't try to do this directly with IRA and other investor. At LLC level, you can set up % by membership units or how the profits would be distributed.
I am just trying to figure out if I am better off tax wise by going the LLC route and occurring UBIT taxes vs borrowing funds from an individual and (I assume) being subject to UDFI? I just want to know the pro's and cons of each.
All investors including your IRA can be pooled in an LLC and the note would be processed through the LLC. This would not trigger UBIT since it is a pooled note, and the IRA is not participating in active business activity.
@Sandy Uhlmann, you could probably use a personal property trust to accomplish the same thing without the headaches associated with an LLC. My experience with them is limited so I am only offering this as an avenue to explore.
I'm taking the figures in your post literally, this changes things if the numbers differ significantly. You're looking at earning $1350 for the term of the note. Setting up an LLC with a compliant operating agreement, assuming you don't already have an IRA LLC that can own the new jointly-owned LLC, will take a big bite out of your income.
If your IRA were to borrow $10,000 to purchase the $15,000 note, your indebtedness would be 67% and your taxable income would be under the $1,000 threshold for filing 990-T, assuming you don't have other taxable income from other properties/activities. Again if your numbers were larger, this would vary. If the income is spread over multiple tax years, you would also have more leeway before hitting the threshold. Caveat: I'm an active self-directed investor, but not a tax professional.