Getting creative as a "Disqualified Person".

[David Betz]

I had planned to invest with my mother using funds from her IRA within a corporation. The goal is/was to flip houses using cash, and split the profits 50/50. After much research, it appears that I would be disqualified from being a part of this, unless I am consulting here and there, and NOT doing any work on the property or taking any real part in this business. I am not particularly worried about staying out of "Her business", as it were, on paper, and raising any red-flags with the IRS. I could check properties/hire subs/etc.. with her without getting my hands dirty. I would do it simply because she is my dear mom, and I would do anything to help her.

She is over the age where she would pay a penalty to cash out an Ira, but I don't want her to pay all the taxes on the gains she's made thus far. We may have our cpa look at what that might cost, but I imagine that it will be ruled out.

So...........

She will (hypothetically, of course) make 50-60K in her first year doing this (all by herself) , and put it right back into the ira to be re-invested. If she takes a disbursement, and pays taxes on it, are there any rules saying what she can and cannot do with it? Is there anything to stop her from using money from other accounts to assist me in my goals?

If have a few ideas:

-She is allowed to "gift" a relative $13000 per calendar year.

-I am a renter, and would love my first home to be a four-plex. The place would be in both of our names, and she would be providing a down payment from a disbursement of any one of her several iras, or another account.

-New lexus in her name with me as co-insured? :wink: hehe

[Jon Holdman]

Your mother's IRA absolutely cannot lend you money. Ancestors and descendents are all disqualified parties. If your mom's IRA were to lend you money, and the IRS were to discover the prohibited transaction, you're mom's ENTIRE IRA, would be immediately and irrevocably distributed. Not just the amount she loaned you, but that entire account. She would immediately owe taxes and penalties on the entire amount.

This is not an area to mess around, because the penalties are so stiff.

Active business are not particularly well suited to being done in an IRA, because of the UBIT tax. That includes fix and flipping, wholesaling, running a shoe store, etc.

Even owning a rental property in and IRA does not appear to be profitable. Free and clear rentals are nice and safe, but don't produce great returns. Mortgaged rentals in an IRA also get hit with UBIT.