All Forum Posts by: Doreen Chaisson

An LLC is not required to lend IRA funds to an unrelated third party in the form of a secured note (mortgage/trust deed). The loan docs are drawn up with the IRA as the lender, and all are signed off, on behalf of the IRA, by the IRA custodian. The IRA then holds that note as an asset. Most custodians will require an ammortization schedule be supplied and that a loan servicer be retained to keep track of the principal & interest payments, which are made payable directly to the IRA. Property tax payments in this structure would be the responsibility of the borrower/homeowner.

You are correct, the IRS considers this "reciprocal lending" and is a linked transaction to a prohibited transaction. You are each using the other's IRA funds for what is ultimately personal benefit. Most custodians will not accept reciprocal loans. If detected in an audit or tax filings, the penalties to the IRAs are hefty, including immediate distribution of the portion involved in the prohibited transaction, which is a taxable distribution, penalties for early distribution if you are under 59.5, as well as punitive penalties.

The only true difference between using a Self-directed IRA and a Solo(k) when it comes to investing in real estate is that leveraged real estate held in a Solo(k) is not subject to UBIT tax on any income earned. Otherwise, the process and the prohibited transactions are the same across the board. Solo(k)s do offer higher contribution limits, but the salary deferrals are tied to the income you earn in that qualifying business. I've seen people suggest you can have a Solo(k) by doing something as simple as setting up an LLC for selling items on CraigsList or Amazon. While this may be true, the salary deferral you would be eligible to put into that Solo(k) would be tied to the income you earn in that LLC - you can't take earnings from another fulltime job and claim them as salary deferrals into your Solo(k).