How can I best partner with my SDIRA?

Question

I've been contemplating how I can best partner with my SDIRA Checkbook LLC so that we both benefit. I understand that I cannot simply straight borrow from it, even if the terms are on par with the market. However, can I establish an LLC - which is it's own separate entity - and lend to the LLC? And just going out on a limb here, if I cannot/should not do so because I am a disqualified person, can I simply register the LLC in a state with excellent privacy laws?

I am looking at a property to rehab and cash-out refinance but would rather work with the SDIRA Checkbook LLC as a private/hard money lender instead of using a third party.

So, I am sure there will be a lot of 'you can't' thrown around. Even so, in true Rich Dad fashion I'd like to ask 'How Can I?' Options?

Moreover, If someone does engage in prohibited transactions, how would the IRS ever find out? Will it only be discovered during an audit or are there some other checks and balances in place?

Natalie Kolodij · Answer

Did you really come here to ask how to get away with tax fraud? Come up man, invest ethically like everyone else.

The plan administrator won't let you do those prohibited transactions because they want to avoid losing their license.

@Dmitriy Fomichenko may have some good suggestions on the best way to correctly utilize your SDIRA

Brian Eastman · Answer

Account Closed

Seconding the concept of "just don't go there".

IRS rules are strict about avoiding any direct or indirect transactions of provision of benefit between and IRA and a disqualified party, in either direction.

You and any LLC you own are disqualified to your IRA.

The IRA may not lend to you or any entity owned by you or a disqualified party.

The penalties for engaging an a prohibited transaction are severe, and not worth messing with.  "I hope I won't get audited" is not a strategy for success.

Secondly, I will caution that there is information on the internet about "partnering with your IRA" such that a joint venture is setup.  This is an interpretation, and not something explicitly outlined in the tax code.  If done in just the right way, it {might} pass scrutiny in an audit.  Most of the scenarios proposed to us by potential clients for such joint ventures would likely create a benefit between the parties and not pass scrutiny in an audit.

There are many ways to safely and productively grow your IRA investing in non-traditional assets such as real estate in a standalone fashion,  There is no need to take unnecessary and foolish risks with your retirement savings.

John Hyre · Answer

Good comments.

@Natalie Kolodij's comment is spot on:  You are asking us to help you hide a  clear and premeditated PT.  No thanks, I like my license, my freedom, and my reputation.  I am pretty darned aggressive, but what you ask is well beyond the pale.

I have taken SDIRA's through audits and Tax Court.  I won both Tax Court cases without having to litigate (IRS conceded the cases before trial).  I am one of the few people who has seen how the IRS deals with these issues.  They can and sometimes do look deep.

For example:  In a case where a client had a bunch of rentals in an IRA-owned trust, the IRS contacted the trustee, property manager, and some of the contractors and inquired as to both what they did with the properties, as well as what the IRA owner did.  And while it sounds all "tough guy" to say you or your cronies will keep mum when the IRS asks questions.....that is not what happens in practice when they shine the light on you.

Tracking source of funds to a separate LLC that you funded in  a "private" state - even if it is "owned" in "someone else's name" (aka via a nominee) is easily done if you are the IRS.  That is a 101 type of technique, the IRS is very aware of it.

If "I won't get caught" is the approach, then you can whack anyone you want - as long as nobody wonders why the rose bushes in the back yard are growing so nicely and digs to find out.  But asking us to participate in structuring the cover up, not to mention posting it online, strikes me as rather poor judgment.

There are plenty of ways to grow SDIRA's/401K's/HSA's/CESA's legitimately.  I'd focus on those.

And spare the "Show Me How, Be Happy & Positive, Don't Be Negative and Tell Me No" pablum.  It's my job to interpret the tax laws aggressively (if the client is aggressive and understands the risks) and to save the client money.  It's also my job to keep clients from crossing clear black & white lines.

Daniel Dietz · Answer

I would second what the experts abover are saying. My first venture into SDIRA investing I did a joint venture with a dsiqualified person. We used a lawyer that specialize in retirement account investing to make sure to do it 'right'.

What I didnt know was that 1) We could never use leveraege 2) that we could not add more properties to that same LLC we formed in the future.... a new entity would need to be set up. Even with expert help we did not fully understand it.

We have since disbanded that venture and each found others with SDIRAs or SOLO401Ks that are NOT disqualified people to each of us and partner with them on things.... MUCH simpler!

Dan Dietz

Dmitriy Fomichenko · Answer

Larry,

You IRA (or LLC it owns) can not invest in your own deal, period.

Using an entity (regardless how private it is) doesn’t change the fact that you personally are behind it. Indirect prohibited transaction IS a prohibited transaction.

Carl Fischer · Answer

Account Closed

The self directed accounts are to good to mess up.

You just told the world what you were thinking how wouldn’t the irs not find out?

Account Closed · Answer

@Natalie Kolodij I wouldn't say I am asking about how to get away with tax fraud, that would be crazy. I am just exploring any potentially creative solutions that are well within the legal bounds of the law - or at least the grayish areas!

I understand how the plan administrator would not allow such transactions but having a Checkbook SDIRA it seems like the plan administrator is very very hands off. As far as they are concerned, the SDIRA is invested in shares of an LLC. They haven't ever really expressed interest in knowing what the LLC invests in.

Ian Kee · Answer

https://sdirahandbook.com/

How can I best partner with my SDIRA?

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