Can I lend from a SDIRA to an LLC I have a minority stake in?

Question

I’m a passive partner, 30% stakeholder, in an LLC where we buy and hold rentals.

I’d like to create a SDIRA or SOLO401K and loan the LLC money at fair market rate.

Since I’m not a majority stakeholder, I don’t believe I’m a disqualified person.

The retirement account would only receive the interest from the loan.

I would receive some benefit as a 30% owner in terms of rent, tax benefits etc.

Is there a way to legally do this in any type of retirement account?

Thank you!

Steve O’Leary

Dmitriy Fomichenko · Answer

Here is the list of lenders specialising in lending to retirement accounts:

https://www.biggerpockets.com/...

Brian Eastman · Answer

@Steven O'Leary

A lot of people misinterpret IRC section 4975 as you have and assume that if a LLC is not in and of itself a disqualified person then a transaction must be OK.

The prohibited transaction rules are somewhat complex and the benefits of working with a knowledgeable professional in the space are clear.

In your specific case, the LLC in question is not a disqualified person to your IRA.  You are, however, a disqualified person.  Any transaction between your IRA and the LLC where you hold an equity stake therefore creates an indirect benefit to you as a disqualified person to the IRA.  IRC 4975 specifically precludes any direct or indirect benefit between an IRA and a disqualified person.

An opposite example would be a case where a syndicator, fund, or startup is forming a LLC to bring in limited partner investors. You and your IRA could both invest in such an opportunity (as say 1% - 5% stakeholders) as neither of you controls the LLC and there is no interaction between the two investments.  In essence, it is like you deciding to purchase shares of a public stock both personally and with your IRA.

Brian Eastman · Answer

@AJ Shepard

I think you may be overstating the restrictions.  Many attorneys including our counsel are OK with limited administrative actions by the IRA account holder as a property manager.   Using a property manager is a good idea, but is not a strict requirement.

As a disqualified person, you cannot benefit from or provide benefit to the IRA. The basic acts of executing contracts, paying expenses, and depositing income would not be considered services or adding value unless there was significant scale.  These are administrative in nature and allowable as someone overseeing the investments of the plan.  it is not a lot different than doing research before investing in stocks or funds, which you are clearly allowed to do on behalf of your IRA.

What you should not do is pay yourself (or any disqualified person) for acting as a property manager or put in sweat equity such as performing work on a property owned by your IRA.

Brian Eastman · Answer

@Steven O'Leary

You are a disqualified person to your IRA or Solo 401(k).  There may be no direct or indirect transactions or benefit between a plan and a disqualified person.

If you have management control over the LLC you mention, then the LLC is also considered a disqualified person to your IRA whether you have controlling equity or not.

Even if the LLC itself is not disqualified, you are seeing a benefit by having the entity you are involved in receive capital from your retirement plan.  The fact that the loan may be at market rate is not of relevance.

This transaction would be a clear no based on IRC section 4975 prohibited transaction rules.

Dmitriy Fomichenko · Answer

@AJ Shepard

Not every lender will lend to an IRA so it may be difficult to find the right lender if you don’t know where to look. However if you are talking to the right lender and property meets the criteria - it is fairly easy to get the loan for an IRA.

Dmitriy Fomichenko · Answer

@AJ Shepard

You can perform basic “administrative duties” as a manager for your IRA LLC or as a trustee for your 401K trust. That is not a “sweat equity”. Those are your responsibilities. It will work on a SF  since those duties will be limited. It will not work for MF since that work would be considered “service”.

AJ Shepard · Answer

@Brian Eastman

Sorry I guess I’m confused.  You’re saying you can act as property manager but you can’t put in sweat equity.  You also can’t pay yourself for property management?  Do you think that managing a property should be free?  If you, the manager of the property don’t charge anything (cause you can’t benefit) isn’t that putting in sweat equity by working and not charging for it?

Seems like a slippery slope you are suggesting and I’d definitely want to get the lawyers opinion in writing before going down this road.

In any scenario, it’s fairly difficult as many lenders won’t lend to an IRA so many times it needs to be in all cash.

AJ Shepard · Answer

@Steven O'Leary

I want to add that you aren’t allowed to manage any investments either.  Should you be able to purchase a property with your IRA, you would need to hire a 3rd party to manage that property even if it’s next door....

Same would go for companies, with you as a manager or member.  But I think that was explained above.

Steven O'Leary · Answer

@Dmitriy Fomichenko thank you for the feedback.

Steven O'Leary · Answer

@Brian Eastman, thank you for the feedback. What was confusing to me was that the language specifically spells out you can’t lend to an LLC you owns a >50% of. Interesting that’s even outlined since there would likely be personal benefit for any LLC an individual owns regardless of percentage.

Can I lend from a SDIRA to an LLC I have a minority stake in?

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