I appreciate if you can answer my two questions below:
1- Can I use my IRA and invest in a Laundromat business as my down payment and borrow rest from SBA?
2- Can I buy a 2nd home with my SDIRA?
1) Not directly in the IRA, no. Your IRA is to be invested for your future, not for your current benefit (or to benefit any other disqualified person). Some people say that you can set up a ROBS arrangement (Rollovers for Business Startup). This works like this: a) you set up a C corporation; b) you appoint yourself the sole director and officer; c) you have the corporation adopt a 401(k) plan; d) you roll your IRA into the 401(k) plan; e) you, as trustee of the 401(k) plan, purchase all of the shares of the C corporation; and (f) you hire yourself to run the corporation. If this sounds a bit complicated to set up and a little expensive, that’s because it is. The IRS has issued some guidance on concerns it has with ROBS arrangements, so if you go down that path you will need to work with someone who is very knowledgeable about this area and can satisfactorily address the IRS’ concerns. Investing your retirement money into what is essentially a start up business certainly can be risky. I would encourage you to do some research on ROBS arrangements and do some soul searching before setting this up. Many companies offer to set up ROBS arrangements. One such firm in Houston is DRDA, Inc., www.borsaplan.com. I am not qualified to make a judgment as to the validity of the structure, so that is something you must decide for yourself. Good luck!
2) Self-directed IRAs do buy real estate all the time. However, if you are asking can you buy a second home which you intend to use periodically personally then the answer is no, for the same reason the first answer is no. You cannot either directly or indirectly gain a personal benefit from your IRA’s assets, other than in the form of a distribution from the IRA.
Good luck with your investments, and let me know if you have any further questions.
Have a great day!
I understand my self directed Ira cannot lend to my daughter. But what if my Realtor borrows money from my IRA to buy a house and then sells that house to my daughter on a wrap,and some time later decided that he wants to sell out his equity in the wrap, could my IRA buy that note?
Thank you for your question. The answer is no, your IRA cannot buy the note. There can be no direct or indirect benefit to a disqualified person (which your daughter is). Loaning money to your Realtor with the intention that the Realtor sell the house to your daughter on a wrap is only attempting to do indirectly what you cannot do directly, which is to benefit your daughter by facilitating her purchase of a house through the lending of money from your IRA. This is likely to violate more than one of the prohibited transaction rules.
For your reference, see Internal Revenue Code Section 4975(c)(1)(B), which prohibits the direct or indirect lending of money or other extension of credit between a plan (including an IRA) and a disqualified person. Also, you may be interested in Advisory Opinion Letter 2011-04A (Warfield), where the applicants asked if they could purchase a loan with their IRA that they owed to a third party bank who had loaned them money several years earlier. The Department of Labor ruled that the entire loan transaction needed to be reviewed from beginning to the end for prohibited transactions. Even though the loan was obviously not a prohibited transaction when originated, the purchase of the loan from the bank and the subsequent payments to the IRA would be prohibited transactions. Finally, to quote the Tax Court in the recent case of Fleck and Peek v. Commissioner, “Section 4975(c)(1)(B) prohibits “any direct or indirect * * * extension of credit between a plan and a disqualified person”. (Emphasis added.) The Supreme Court has observed that when Congress used the phrase “any direct or indirect” in section 4975(c)(1), it thereby employed “broad language” and showed an obvious intention to “prohibit something more” than would be reached without it. Commissioner v. Keystone Consol. Indus., Inc., 508 U.S. 152, 159-160 (1993).”
I know that’s not what you wanted to hear, but it’s better to ask questions now than to destroy your IRA and possibly owe taxes and penalties. Have a great day!