Hi. The administrator of your girlfriend’s SD-IRA should be able to help. Entrust Administration’s website may also help. My CPA Eric Wikstrom specializes in this very thing and works with Entrust. His website is: www.iwealthstrategies.com.
As a suggestion, you can buy her out or her you. But you have to do it prior to marriage, if that’s in the cards. By the way it is a great time to buy commercial real estate in a SD-IRA because there is so much owner financing with significant down (>20%). Good luck.
How to Buy a Property Out of SD-IRA? - Posted by PeteH(NYS)
Posted by PeteH(NYS) on March 09, 2011 at 09:51:54:
Hi–
My girlfriend & I co-own summer rental cottages in a LLC. Her LLC shares are held by her self-directed IRA, and we are now looking to buy out her IRA’s interest so she can hold the shares individually. The prohibition against self-dealing is what we need to solve – she can’t buy or sell directly from her IRA, or hold anything in the IRA from which she derives a benefit (like living in the property). I suspect our only recourse is for me to buy the LLC shares from her IRA – with money from the sale of her house – and then transfer those shares back to her afterward. Can this be accomplished without triggering a taxable event from violating the self-dealing prohibition? What are our options?
(Note: she currently holds a 67% interest, and I hold 33%. Our reason for wanting to get the shares out of her IRA is, we are considering moving full-time to the cottages property, which is also prohibited by the self-dealing rule.)
Re: How to Buy a Property Out of SD-IRA? - Posted by John Hyre
Posted by John Hyre on March 16, 2011 at 14:07:22:
I do not have any happy answers for this one. While I am pretty aggressive on regular income tax issues, I am far more conservative were Prohibited Transactions are concerned, because the penalties for same are draconian, and very little law exists to guide us.
What you propose would not work if the IRS were to become aware of all the facts - they would simply “look through” the transaction, view you as a “straw man” and treat her as if she had directly engaged in a prohibited transaction. Given the massive penalties associated with PT, if she absolutely must have the property and cannot wait until she is of age to distribute from the IRA, I would simply distribute the property, pay tax & 10% penalty on that distribution, which is “less bad” than a PT. In PT entire IRA would be distributed and taxed, with much more extensive penalties.
I’m not a lawyer and you’ll need to get one’s opinion who deals with self directed IRA issues, but, an option you might consider is having them legally changed to a co-op or condo designation and naming which units are then held by you and which are held by her IRA and then living in one of the ones owned by you.
Re: How to Buy a Property Out of SD-IRA? - Posted by PeteH(NYS)
Posted by PeteH(NYS) on March 17, 2011 at 10:24:32:
Hmmm. Thanks, John, for the thoughtful reply. So there’s really not an exit strategy that results in her being able to hold the shares directly.
I think our best approach is to go buy a different house privately and just run the investment property as it’s currently held until such time as it makes sense to sell the cottages. Once we live within 10 mins of the rentals we’ll be able to rent out the main house, which improves the investment income.