Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
Hello,
I have been doing a lot of reading here and otherwise of SDIRA's. I understand that a person cannot buy from, or sell to, a prohibited party, such as a parent or child.
My questions is this; if one party who owns a property in a SDIRA wants to sell it, and a prohibited party wants to buy it, either within a SDIRA or otherwise, are there certain rules that apply to the timeline of how long it would have to be owned by another outside party that is NOT a prohibited party - such as a 'fellow friendly investor'?
Investor · Chattanooga, TN · Member since 2009 · 1k+ posts · 903 votes
14y
Your IRA is not prohibited from owning a property that was once owned by an ascendent or descendent of yours, as long as it's an arm's length transaction. If for instance, your parents sold a property to a third party, who then sold it to you after ten years, then that would be fine.
The time frame between ownership would be the key issue, and to my knowledge there is no minimum on that which leaves a grey area open to interpretation. The shorter the time in between, the greater the risk to you.
As an aside, you may want to look into different investment strategies than owning real estate inside an IRA. There are plenty of threads about that subject here. Since there are no tax advantages to the IRA, you lose a lot of the benefits to owning real estate. Notes, and financing are a different story though. And I say that as someone who has owned multiple properties within my IRA.
Investor · Chattanooga, TN · Member since 2009 · 1k+ posts · 903 votes
14y
What you are talking about is fraud. If the transaction gets flagged or audited, it would be fairly easy for them to unwind what happened and liquidate both IRAs.
Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
14y
What I am trying to ask is just that - what time frame would NOT make it fraud. The scenario that is in my mind is similar to this. Parent owns property in SDIRA. They sell it to an outside party that might hold for a period of time - maybe 1 year, maybe a decade - most likely NOT in an IRA account. After that year or more, would it THEN be OK to have a family member buy it, since there had been a legitimate 'neutral party' holding ownership?
Partially I am wondering this because of the age spread and investment goals of both my own family and other friends that invest in real estate. Example would be a desirable steady but conservative rental property that an 'older' investor might want for a 'safe and steady' return in latter life - as compared to a more aggressive strategy. That philosophy might fit 'generationally' so to speak.
Hope that makes more sense. It might still NOT be acceptable - that is what I am wondering - can a 'prohibited party' EVER own it again.
Investor · Chattanooga, TN · Member since 2009 · 1k+ posts · 903 votes
14y
Your IRA is not prohibited from owning a property that was once owned by an ascendent or descendent of yours, as long as it's an arm's length transaction. If for instance, your parents sold a property to a third party, who then sold it to you after ten years, then that would be fine.
The time frame between ownership would be the key issue, and to my knowledge there is no minimum on that which leaves a grey area open to interpretation. The shorter the time in between, the greater the risk to you.
As an aside, you may want to look into different investment strategies than owning real estate inside an IRA. There are plenty of threads about that subject here. Since there are no tax advantages to the IRA, you lose a lot of the benefits to owning real estate. Notes, and financing are a different story though. And I say that as someone who has owned multiple properties within my IRA.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
14y
Arm's lenth transactions are key factors here.
Also, you can sell to a prohibited party IF - you get permission from the IRS. If you can prove and show that neither the disdqualified party or the IRA owner is benefited more than from any other standard transaction, the IRS may grant permission.
Is there a timeline . . .? Not set in stone anywhere I know of in the IRS rules and guidelines regarding SDIRAs, but I am sure that after a few years have gone by, it would be ok. That said, intent plays a huge role also. If it was your intent to sell to one non-disqualified party with teh intent to have thme re-sell to the disqualified party 3 years later, then yes, it could be ruled as a prohibited transaction.
Accountant · Hyattsville, MD · Member since 2011 · 120 posts · 44 votes
14y
I checked with Satchie Carvounis at Security Trust and she confirmed that: No the IRS rules don't address this situation, it simply states that the IRA can't engage in any transaction with a prohibited party. However, the IRS can follow a paper trail and see what they intended to do – and that would involve engaging in a transaction with a prohibited party.