I currently have a self-directed IRA and have some cash in it from a recent deal. I am a 50% owner of an LLC with a hard money loan on a home we are currently trying to sell. Basically, I need to determine a safe way to invest(not take a distribution) my Ira money so that the money can ultimately pay off part of that hard money loan.
1. Could I just make a personal loan to my partner in the LLC and he could the pay down the hard money loan? He is not related to me. Or is this just too direct a transaction?
2. I know another real estate investor who has nothing to do with the LLC who is willing to help in any reasonably safe way. Do I have my IRA do a promissory note to this investor who then loans the money to the LLC? Do we have the loans for differing amounts of money? Do we do any of this using some instrument other than or in conjunction with a promissory note, i.e. a second mortgage on the investor’s home and a second on the home that the LLC is trying to sell?
Please advise on the safest way to invest the IRA and get the loan paid down.
Unfortunately, there is probably no safe way to accomplish what you want to do. You should understand that your partner in the LLC is, in fact, a disqualified person to your IRA. The reason for this is that any entity owned 50% or more by an IRA owner is a disqualified person to the IRA, which means that your LLC is a disqualified person to your IRA. Furthermore, because your partner owns 10% or more of your LLC, he or she is also a disqualified person to your IRA. So loaning money to your LLC or your partner is out of the question as a direct violation of the prohibited transaction rules.
In your second scenario, what you describe is a step transaction. Unfortunately, you are not permitted to do indirectly what you cannot do directly under the prohibited transaction rules. Since your IRA money cannot be used to pay down the hard money loan directly, trying to take two steps to accomplish the same goal does not work either. Even if you make it harder to detect what is going on through the use of different loan amounts or different timing of the loans, unfortunately it will not change the basic fact that as a direct result of your IRA’s investment in a loan to your non-disqualified investor friend you, your partner and your LLC will all benefit from having the hard money loan paid down. This would also be a prohibited transaction.
If you have not taken a distribution from your IRA in at least twelve months, you could take a distribution and as long as you returned the money to your IRA or another IRA within 60 days it would not be taxable. Of course the danger of this strategy is that if you were unable to return the money to the IRA it would be taxable and you would possibly face penalties if you are under age 59 1/2, assuming the IRA you refer to is a traditional IRA. If you were able to return part of the money to the IRA, then only the part that you were not able to return would be taxable. This may not be the best strategy for you to deal with your issues, given the level of risk involved, but at least it would avoid the danger of a prohibited transaction.
I’m sorry I was not able to offer you a solution to your problem. We are not permitted to give tax, legal or investment advice, but I hope I have given you and your legal or tax counsel some things to think about. If Quest IRA can ever be of service to your or your acquaintances, please do not hesitate to contact us. Have a great day!