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Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 11147
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Is the IRA portion of the following investment a prohibited

Customer Question

Is the IRA portion of the following investment a prohibited transaction?I will invest individually and then about 90 days later through my self-directed IRA in an LLC which is acquiring income producing property. Numbers are as an example only.I will invest $25,000 of personal cash funds and $25,000 of personal funds from my line of credit in the LLC acquiring the property.In 90 days, or so, my self-directed Roth IRA will invest $150,000 in the same LLC. The IRA will not have the funds available until another investment pays off in 90 days or so. Some time after my IRA invests, the LLC may buy back my individual investment interest, the portion from my line of credit funds for sure and possibly the $25,000 cash investment interest.Would this be a prohibited transaction if it appeared the individual interest was bought out after (related to) my self-directed IRA made/making its investment? Thank you.
Submitted: 12 months ago.
Category: Finance
Expert:  Lane replied 12 months ago.

Yes, so sorry, this is self dealing.

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Prohibited IRA transactions include:

  • Personally borrowing money from the IRA
  • Selling, leasing or exchanging property to the account
  • Accepting unreasonable compensation for managing property or assets held by the IRA
  • Using the account as security for a loan
  • Granting account fiduciaries to obtain, use or borrow against account assets for their own gain
  • Transferring plan assets, lending money, or providing good and services to disqualified persons*

* Disqualified Persons: For Plan purposes, disqualified persons is defined as the account holder and his or her spouse, lineal descendants, account fiduciaries, trustees, investment managers and advisers; and any corporate or LLC entity in which the account holder has at least a 50 percent ownership.

Expert:  Lane replied 12 months ago.

26 U.S. Code § 4975

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I hope you’ll rate me (using those stars, rating request, or faces on your screen) based on thoroughness and accuracy, rather than any good news / bad news content. That’s the only way I’ll be credited for the work here. But please let me know if you still have questions.

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Lane

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I hold a JD (Juris Doctorate, a doctoral degree in the law), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in finance & tax, as well as CFP® and CRPS (Chartered Retirement Plans Specialist) designations. - I’ve been providing financial, Social Security & Medicare, estate, corporate & tax advice since 1986.

Customer: replied 12 months ago.
Can you please say more about why this transaction is self dealing?
Expert:  Lane replied 12 months ago.

Your IRA may not buy an investment from or sell an investment to a disqualified person (you, and others) as defined by Internal Revenue Code §4975. To do so is known as “self dealing”. (the buyback part of your scenario)
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Additionally, investments made with IRA funds must be at arms length, which is most often defined as a willing buyer and willing seller coming together with no undue influence or being a related party.

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