Specific SDIRA Transaction

[Jake Kucheck]

I spend a lot of time reading the old threads but wanted to be absolutely sure before I went ahead with this:

Step 1: Otherwise illiquid father with good credit buys a property from an unrelated third party who is not a disqualified person, pays cash from but does not liquidate his SDIRA (leaving reserves to pay property taxes, etc).

Step 2: Otherwise illiquid father sells property to his liquid but credit repair needing son. This transaction utilizes a down payment (could this potentially be provided by the father?) and seller financing, creating a note not subject to UDFI or UBIT (I don't think).

What I haven't got a straight answer to is whether or not this type of financing provided to a disqualified person (I'm guessing a son is such a person) would cause a problem.

I'm sure there's a lot wrong with this and you will all tell me to talk to a CPA but I figured someone might have seen something similar before...

[Jon Holdman]

If NDP ends up marrying the son post step 4, then it seems logical to assume NDP knows son and father. It further assumes that son would end up hanging out at NDPs house. The more general rule is that any transaction an IRA does must not provide any benefit whatsoever in any form to any disqualified person. So, if son ends up having dinner and a movie at NDP's house, the house financed by father's IRA, the son is receiving a benefit. Therefore, this is a prohibited transaction, even though NDP is not a disqualified party. NDP's boyfriend, son, is receiving the benefit of having a place to hang out. If son does spend the night once in a while, it gets even more clearcut. If, heaven forbid, son moves in with his girlfriend, then this is a rock solid prohibited transaction.

There certainly is some gray areas around what constitutes a "benefit". But trying to figure out exactly where that line is might end up making father, son and girlfriend a test case in a tax court. I'm sure that will be a fun experience. Even worse, you could end up on the wrong side of that fuzzy line. That would help the rest of us to know exactly where that line is, but father would pay the penalty.

Post marriage, NDP IS a disqualified party. An IRS auditor could well make the case that because all these people knew each other up front, and had these relationships and NDP became a DP after the loan was refinanced, that the intent all along was to conduct a prohibited transaction AND to disguise the transaction.

Whoever "son" is, he really must not do this. This might or might not pass muster with the IRS. Its 100% clear to me that it is not 100% clear if this is OK or not. Its in the gray area. I try to stay out of the gray area. Son should fix his own life, save money, rebuild his credit, marry that woman, then buy a house. This is not just "some bank's money". This is dad's retirement. Son should not put it at risk so he and his girlfriend can buy a house they can't really qualify for.