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  1. Very nicely put, Jeff. Real Estate investors can be a very creative bunch, and can start getting very creative when they first learn about the rules of a truly self-directed IRA. It’s almost natural for them (us!)to start thinking about how they can skirt the rules to benefit themselves. It’s an instinct that needs to be suppressed with this kind of education. I try to warn all my investor friends about avoiding these pitfalls. Even when I do lecture on it, it doesn’t always get through.

    I had a colleague recently tell me, in an email, that he and his brother were going to use his brother’s IRA money to rehab a house they both owned. Both would profit from it, too. I was on the phone with them in under a minute to make sure he didn’t do that. He subsequently found another investor willing to lend from his IRA and they are doing the project legally now.

    My investor friend apparently got confused with the fact that siblings aren’t listed as disqualified individuals in the law and decided that he could do this with his brother. If he was just borrowing from his brother for his own project, I probably would have let that go, but they were both going to profit from the project which definitely made it a prohibited transaction.

    By the way, how do you feel about whether a family member, who is not on the lineal line of descent, is a disqualified person or not? It has been my impression since learning about Self Directed IRA Prohibited Transaction rules that my siblings, cousins, aunts and uncles, nieces and nephews are all eligible for trasacting with my IRA and I theirs. What are the rulings on this?

    Thank you!

    — Paul Smudski

  2. Yes, the root problem with PT confusion is that most of the major players (especially the self-directed IRA custodians that have been at it for a decade or two) spend a great deal of time explaining the first 4 PT rules and don’t explain (or possibly understand) the remaining 2 rules. The entire topic of PTs is then misunderstood by the vast majority of people involved in transacting with or researching self-directed IRAs.

    As far as siblings and other non-disqualified person family members transacting with your IRA (or you with theirs), it is okay as long as the IRA accountholder is making the direction decision solely for the benefit of the IRA. In the above sentence I said “OR you with theirs” rather than “AND you with theirs” because the latter would imply a benefit swapping scenario which, as discussed in the post, does trigger a prohibited transaction.

    Yes, fully understanding and complying with PT rules is a challenge for real estate people because real estate has a much stronger semblance of free enterprise, and thus real estate people develop mental/strategic habits that are normally fine, but they often don’t fly with the PT rules for IRAs and 401(k) plans.

    I’m glad I could help 🙂

    – Jeff

  3. I am interested in purchasing precious metals with my IRA-LLC. What type of reporting regulations do I have to comply with? Financial statements? Inventory reports?

  4. Jeff,
    I have a checkbook IRA LLC that was set up for me where I am the manager and the only owners are my wife’s and my SDIRA’s. I only have invested in DOT’s so far. As you can imagine, I need to foreclose on one which has land for collateral. The land is in a desirable area and I am being advised that I can hire a builder to build on it. Is this true? Also, does the DOL or IRS have issues with the existence of these checkbook IRA’s? Thank you in advance for your time.

  5. Jeff,
    Thank you for the link on partnering/coinvesting. Would it be considered partnering if the IRA LLC, which owns the land, hires a builder to build a house on the land? I would not be building it myself. The builder would be providing all of the services. Even the plans had already been selected by the previous owner of the property. My involvement would be writing the checks to the builder.

    Ron

  6. Jeff,
    I find this very interesting but don’t see the answer to my two questions below:
    1. I want do use my self-directed IRA to purchase stock in a private company that will, at the same time, do a reverse merge into a public shell. I would own less than 5% of the outstanding stock. I am pretty sure that would be ok, right?
    2. If I were to become an officer of that public company, would that be a problem?
    Thanks for your help.
    Chuck

  7. Ron,

    I’m in the process of writing a blog post elaborating on the issue you just rose. Make sure you subscribe to this blogs RSS feed for real time updates.

    —–

    Chuck,

    1. Ok in terms of what?

    2. Probably. By virtue of the question you are asking now, you are providing evidence that if you were to direct your IRA to make that investment you would have an expectation of that decision possibly leading to being an officer in that company. That’s a conflict of interest and likely a prohibited transaction.

  8. Jeff,
    Do you have to do it at a brokerage firm (with the accompanying yearly fees) or is there a place where you can set it up with no-feess (like other 401K’s thru Fidelity or Scottrade or whatever.) ?

  9. Jeff-I want to buy a house and rehab it. I would like to hire out the major stuff but can I do any work-repairs to the property before I resell it? I would not pay myself, I just want to hands on managing this property

  10. Jeff,

    Great blog.

    I understand leverage can be utilized by self-directed IRAs so long as the leverage is only secured by the specific IRA investment (e.g., real estate) and is non-recourse to the IRA owner/beneficiary. Can you confirm this? Does this only apply to real estate investment or can other types of investments be leveraged so long as they follow the rules above. Also, I assume the IRA investment is permitted to service the leverage/loan utilizing income the investment produces or ultimately by the sale of the investment.

    Thanks.
    PS

  11. Hi Jeff,
    My Wife and I acquired a second home 4 years ago and now need
    to do extensive rework to it for it to become move in ready for my ailing mother-in-law. We have no way to finance it other than creating an llc and moving my IRA into a (solo) IRA and borrowing from it as a loan to make this happen. Does this sound plausible as well as legal?
    I must be missing something as this sounds to simple.
    Thank you and great blog!
    Ron

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