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May 11, 2020

Your self-directed IRA is a huge tool for creating tax-free or tax-deferred wealth, but it is fraught with technical rules and potentially deadly pitfalls.  One of those pitfalls is doing transactions with parties that are “disqualified”, namely spouses and lineal ascendants and descendants (parents, kids, etc).   Thus, you can’t borrow from your mother’s IRA to buy a property.  Nor can you borrow from your own IRA, or do any business with your IRA. However, you CAN get around this rule by CO-INVESTING with these parties as another way to skin the proverbial cat.

According to Department of Labor Advisory Opinion 2000-10A, an IRA can simultaneously purchase a partnership interest alongside the IRA owner’s relatives without violating the disqualified parties’ rules (i.e., IRC Section 4975).  Thus your IRA and your spouse’s IRA, for example, could partner together and buy a property from a third part with their respective funds.  So long as the purchase is done as co-investments, not buying part of the property from the other after the fact, this could work nicely.

Example: Sol is selling a duplex for $250,000. Bob has $200,000 in his self-directed IRA account. Bob’s LLC has $50,000 cash in its bank account. Bob and his LLC could buy the duplex together from Sol, with Bob’s IRA being an 80% owner with Bob’s LLC, which owns 20%. The title to the deed would read substantially as follows: “Bob’s IRA Account 80% and Bob’s LLC 20% as tenants in Common”. Another way to title the property is in a land trust, with the two co-owners as beneficiaries.

Many IRA experts (myself included) agree that in order for this to fly, the partnership distributions must match the partnership contributions; in other words, you can’t contribute 70/30, but split profits 50/50, as in the case of a regular partnership that did not involve IRAs.  In the “Bob” example, the partnership distributions would have to go 80/20.

Also, keep in mind that the transaction must be entered into at the same time from a non-qualified party.  For example, it would not be permissible to purchase a property with your IRA one day and have your son buy half of the property from your IRA a week later.  Your must co-invest simultaneously and buy from a party that is NOT disqualified (e.g., buying from a seller who is not related, on the open market).

IRA rules can be tricky and violating these rules can have disastrous consequences, so make sure you deal with a professional who is versed in the law.

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William Bronchick, ESQ.

Nationally-Known Attorney, Author, and Speaker

Attorney William ("Bill") Bronchick, the host of Legalwiz.com, has authored six best-selling books and is sought nationwide for his 30+ years of real estate and legal knowledge. He has been interviewed by numerous media outlets, such as CNBC, TIME Magazine, USA Today, Investor Business Daily, Forbes, and the LA Times, to name a few. William Bronchick is the co-founder and past President of the Colorado Association of Real Estate Investors and the President of the Colorado Landlords Association. Click on the "About" link above for more information on William Bronchick.

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