Roth Guidelines for my investment

You asked:

If my PPT options a note with the intent of finding another buyer, how much if any earnest $$ does the PPT have to put down to be in compliance with the ROTH guidelines? The ROTH is not keeping the tale of the note.   I assume the same pertains for a real estate transaction.

My answer:


Thanks for the question. Unfortunately, there is no good answer.


I would be a little concerned with your verbiage below, however. You state that you want your PPT to option a note “with the intent of finding another buyer.” That sounds definitively like note brokerage, as opposed to a great investment. Note brokerage is a service, which would normally be subject to self-employment taxes outside of the context of an IRA. If so, then it is a service inside of an IRA as well, meaning there is the dual risk of it being called Unrelated Business Income (UBI), which as you know is taxable to your IRA, or worse a prohibited transaction because you are providing services to your IRA.


This reminds me of the bankruptcy case in Atlanta, Georgia earlier this year (Cherwenka v. RES-GA Gold, LLC). In that case a house flipper was accused of entering into a prohibited transaction by providing ‘services’ to his IRA. Fortunately, the house flipper won in bankruptcy court and preserved his IRA. He argued successfully that all he did is make investment decisions. Unfortunately, it is not a Tax Court case, so it doesn’t have as much impact as we would like. It does frame the argument nicely, though, so it is definitely worth reading. I’m not at all sure the case would have turned out the same way in Tax Court. It will be interesting to see if the IRS picks up on this argument in future cases.


The important point is that you are permitted to make great investments in your IRA. You are not permitted to provide services to your IRA or make an excess contribution to your IRA, whether that be in the form of services or manipulating the paperwork to get a grossly undervalued asset into your account, especially from related parties. The Tax Court has the power to look at the substance of a transaction over the form of documentation used. You must always structure any transactions in your account as investments. For this reason I generally encourage people to stay in the deal in some way, because in that way it is more easily understood to be an investment.


Of course this is fun to talk about from an academic viewpoint, but in the real world you must be practical. Look at risk vs. reward. Remember that piglets get fed, but hogs get slaughtered. The size of your IRA and the nature of your transactions will influence what the IRS position might be in the unlikely event of an audit.


I’m sorry there isn’t a clearer answer to your question. As you know, Quest IRA cannot provide you with tax, legal or investment advice. I’ve tried to give you some things to think about, but you should definitely check with knowledgeable tax and/or legal counsel before entering into any type of investment.

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