Self-directed IRA/401k - conflict of interest triggers "prohibited transaction"?

[Ravi Veer]

Hi,
I am planning to start an LLC to purchase a real estate. My friend's IRA (IRA-A), my IRA (IRA-B), my friend (A), and me (B) are planning to invest. I have been reading up on IRA-LLCs and have a couple of questions.

The residential property will require a total gut job for which I plan to be the General Contractor.

1. Can any services be provided by disqualified person (A or B) to the LLC? Or, will 4975(c)(1)(c) construe it as "prohibited transaction"? Also, will it be considered as transferring value from the IRA beneficiary (A or B) to the plan (IRA-A or IRA-B) triggering "excess contribution" (per Tax Court Memo 2012-168, or Commissioner Email CCA_2009112409523350)?

2. Can the IRA plan beneficiary (a Disqualified Person) even make decisions on where to invest? Isn't that considered "furnishing of goods, services, or facilities between a plan and a disqualified person" per 4975(c)(1)(c), hence a prohibited transaction?

Ravi

[Jon Holdman]

If your IRA were to do a rehab project, hiring you as the GC would be a prohibited transaction. OTOH, if you were to do the work for free, your work would be considered a contribution. Generally, you should avoid doing either. If you're going to do fix and flips with an IRA, you need to do it in a hands-off fashion. Hire others to do all the work.

That's just one of the down sides to doing fix and flips in an IRA. Another is that fix and flipping is an active business and will trigger UBIT. Yet another is that if you run out of money, you're in a world of hurt. You cannot personally add money into the project. The IRA has to come up with additional money.

Yes, you can make decisions about where to invest. You just cannot personally benefit. I was warned, for example, to not buy a house with my IRA in my own neighborhood, as that could be taken as improving my neighborhood and increasing the value of my personal residence.