Self Directed IRA/Checkbook IRA Question

[Peter S.]

I want to use a self directed IRA with Checkbook control to purchase a property. However, I do not have enough money to purchase the entire property. I know that the income generated from an investment property purchased by a self directed IRA must return to the IRA; however, what would happen in this case? Could we treat the self directed IRA like a private money lender and say it is "investing" in our company? Typically we would give a private money lender 10% return on their investment as their income....so could we do that with the LLC associated with our self directed IRA that has Checkbook control? Then the "income" for that IRA would be the 10% ROI received. And then we could keep doing it. Has anyone ever done this? Thanks for the help!

[Brian Eastman]

@Peter S.

You cannot do what you propose, as that would create a transaction between the IRA and you.

The IRA can purchase a property using a mortgage. The IRA is the borrower and the mortgage must be non-recourse - meaning no personal guarantee from you.

The use of debt-financing creates a small tax liability for the IRA. The tax is known as UDFI. The net result is still positive for your IRA, however, as you get to use leverage and should achieve a higher cash-on-cash return.

There is a lot of information here on BP on the topic.  I'd provide more detail but need to head into a meeting.