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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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I have a question about the prohibited transaction rules for

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I have a question about the prohibited transaction rules for self directed IRAs. My wife and I want to purchase real estate for invesment and long term growth. We would like to purchase this real estate with our LLC of which we both have a 50% interest. We would like to fund the LLC with personal money, her Self-directed IRA, and my Self-directed IRA. Are we able to do this without breaking the prohibited transaction rules. How to set this transaction up correctly?

Lev :

Hi and welcome to our site!
Prohibited transactions are certain transactions between a retirement plan and a disqualified person. Disqualified persons include the IRA owner’s fiduciary and members of his or her family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).


A prohibited transaction means any direct or indirect transaction described in IRC 4975(c)(1) between the plan and a disqualified person - http://www.law.cornell.edu/uscode/text/26/4975


(c)Prohibited transaction
(1)General rule
For purposes of this section, the term “prohibited transaction” means any direct or indirect—


(A) sale or exchange, or leasing, of any property between a plan and a disqualified person;


(B) lending of money or other extension of credit between a plan and a disqualified person;


(C) furnishing of goods, services, or facilities between a plan and a disqualified person;


(D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;


(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account; or


(F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.



When your personal funds are combined with funds from the IRA - that is considered a transfer to, or use by or for the benefit of, a disqualified person - and as such is classified as the prohibited transaction.
Thus - we need to avoid pooling your own funds with IRA funds.

Lev :

See also Internal Revenue Manual - 4.72.11 Prohibited Transactions - http://www.irs.gov/irm/part4/irm_04-072-011.html




Customer:

I plan not to combine the funds but use the funds to purchase property. Each entity will have its undivided interest.

Lev :

If you simply partner with your IRA to purchase a new property - not the property you already own - that is possible.
Here is the article which describes the scheme - https://www.trustetc.com/real-estate-ira/partnering
As we see - it is possible to partners with other investors and with yourself.
However - such partnering might trigger the audit and you should be prepared. Also - you need to disclose the structure to the custodian of your IRA account.

Customer:

Great!! Does this also mean I can purchase the property with my LLC using this method

Lev :

Yes - there is no difference if you personally partnering with your IRA or the LLC which you own is a partner.

Customer:

So Just have to be very careful to keep all funds separate. What if I need more money? Can I give it personally or does it have to come from the IRAs???

Lev :

What if I need more money? if you need additional money to purchase the real estate - funds may be partnered. At the time the property is purchased - we need clear identify percentage of the ownership for each party.
That percentage may not be changed.

Customer:

I am sorry. I mean after the transaction for other fees or to purchase material etc for the property.

Lev :

All additional investments must be made according to percentage of the ownership for each party.

Customer:

Thank You! I greatly appreciate you time and answers. I have been working on this for several weeks.

Lev :

I suggest to verify the article I referenced above.

Customer:

Thanks again!

Customer:

I will

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Appreciate you for EXCELLENT rating and for the bonus.

Some additional information you might find helpful...
See here - page 17 - j) Co-investment rules - http://www.ritaus.org/assets/documents/RITA.Prohibited.Transactionsforinvestors.final.12.15.10.pdf
<..>
One of the important things to understand is that, in most cases, your IRA may co-invest with disqualified persons including yourself, friends, family, third parties (including entities) and any other IRAs or pension plans you may have. DOL Advisory Opinion 2000-10A outlines the caveats, however, including the fact that you have to be in a position to prove that you could have accomplished the transaction without the use of your IRA (to avoid a PT for enabling).
<..>

DOL Advisory Opinion 2000-10A may be found here - http://www.dol.gov/ebsa/programs/ori/advisory2000/2000-10a.htm

I hope that will help you to clarify the issue.
Still I suggest to discuss all related issues with your tax advisor as that might be not a simple task.
Lev and 2 other Tax Specialists are ready to help you

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