FLIP & SELL USING ANOTHERS SDIRA QUESTION?

Question

Hello, I have a C Corp and a Solo 401K, I have a business associate who has an SCorp w/ SDIRA. We have agreed to gap fund each others deals so that we are not performing disqualified transactions. My question is this. Once each of our LLC’s ar ecreated and all the funds are raised & Operating agreements are in place. What limitations do we have with the funds? I’m thinking that the HM lender or nonrecourse loan will cover the majority of the purchase & rehab cost. The IRA and 401k moneys would be used for holding cost, insurances, Travel & any misc. contractors work etc... In other words with all t his said. Do you see any limitations on how the funds are used during the corse of the process. And is there any issues with the SDIRA for misc activities or would it have to be structured so that the title company only handle particular bulk expenditures or holding cost payouts. We are set up and ready to roll. Just need a little push! Thanks all

Brian Bradley · Answer

@Richard Jumonville talk to @Brian Eastman he is the go to guy on SD IRAs

Richard Jumonville · Answer

Thank you all for your time and shared experiences. Others please feel free to continue to share your qualified experiences and examples of what you learned that would be considered disqualified.

Rick Pozos · Answer

I have borrowed money from a friends sdira. She sent the money to closing. I purchased and did the rehab with the money. When I sold the property, her lien was paid off. I paid monthly interest along the way. Nothing spectacular.Quest Trust co. has a bunch of videos and articles that have lots of information. They have some live stuff on facebook from their meetings. QuestTrustCompany .com.

Brian Eastman · Answer

@Richard JumonvilleThere are no specific restrictions on how money lent by an IRA/401(k) fit into the deal.The 401(k) could fund the entire project.It could provide rehab capital in full or in part.Etc. so long as it makes sense as a real estate transaction.What matters is that:There is no direct or indirect benefit between the plan and a disqualified party.The note instrument is in compliance with state lending laws and therefore enforceableThe issue I see is that if there is a primary lender on the project, then the plan is going to be holding a 2nd position lien, which would be pretty risky on a flip. The primary lender may also have issues with the project if it knows that additional borrowed funds will be required to make the deal work.

Richard Jumonville · Answer

Agreed that all outside capital raised is secured by the property, no one would do that.When using a gap fund partner's SDIRA or Solo 401K, exactly what part of the project expenditures can the money be used for?Can anyone using these partners tell me what how there using this portion of the project's capital?I have a good feel for what my project will cost as I have done a couple fix n flips before. I just never used these types of capital before and want to know any obstacles before I put my upcoming deals together.Thanks in advance

Dmitriy Fomichenko · Answer

@Richard JumonvilleRegarding your original questions: Brian is correct, this type of pre-conceived quid-pro-quo is called a "step" or "linked" transaction by the IRS, because it is nothing more than a scheme to avoid an otherwise prohibited transaction and will be treated as such.

Dmitriy Fomichenko · Answer

@Richard JumonvilleThe expenses you mentioned are to be paid with the personal funds. If you are to get a private loan from someone's IRA/401k the lender is unlikely to just give you unsecured loan to pay for your expenses (I would certainly never do that and would not recommend to anyone else). The loan would be secured by the property, typically in the 1st or 2nd position. It would work like any other loan, with the exception of the lender being a retirement account instead of a bank.

Richard Jumonville · Answer

Thank you Brian for your insight. I will always run my plans thru my advisors as you are right, we paid good money for setting up our entities and continuous support. I really like the Bigger Pockets platform to bounce ideas and experiences from others who are actively investing. I see what you mean how that could be beneficial the way it was stated. It never occurred to me that we would be trading services and that it could be viewed as self benefitting which could be viewed as disqualifying event.We certainly do not want any gray areas when it comes to that subject.On the other hand I still would like some insight on what limitations when using another's SDIRA/Solo401k from a great leader like yourself and others in the Bigger Pockets community. I have multiple options outside of the associate mentioned earlier with IRA's. I'm really wanting to wrap my mind around what others are doing with a gap loan received from persons with SDIRA's & Solo 401ks? Are they using the funds for the following or is there issues with these listed below?Paying holding costPaying Insurance premiumsMy Travel expenses to out of state propertyHiring of misc. contractors outside of generalInspectionsStaging for saleAdvertisingwhat else?I appreciate all comments

Brian Eastman · Answer

@Richard JumonvilleIf you have a Solo 401(k), I suggest you contact the firm that set that up for you if you need guidance. That is what you paid them for.Any quid pro quo arrangement where "I'll lend to you from my IRA if you lend to me from your IRA" would be a bad idea, as the IRS would view that as an indirect benefit to yourself and essentially loaning to yourself from your IRA. When lending, you simply need to have a note that is legal and enforceable per the lending laws of the state. Work with a local attorney to come up with something appropriate. And, there needs to be no direct or indirect benefit involving a disqualified party to the IRA.

Richard Jumonville · Answer

Thanks guys for the input, I did reach out to @Brian Eastman but have not heard anything back yet. Jim, can you tell me as an investor who has a SDIRA, can you tell me some examples your IRA money was used by various investors who you loaned money to or partnered up with?