IRA self-dealing solution? - Posted by James Buster

Posted by JHyre in Ohio on July 02, 2002 at 07:23:01:

If the IRS caught it and pressed the issue, they’d probably prevail in court based on “step-transaction” or similar doctrines…you may have business purpose for the sale of the note (need cash), but the purchase by the IRA, especially if repeated or mandatory for the purchaser, has no real business purpose…the courts would look at the sum of the parts. You increase your chances of prevailing if 3P is not bound to sell to IRA and in fact keeps some of the notes. The chances of getting caught are low, but if you do, I think you have an uphill argument at best. Could the IRA not buy the home (from a true 3rd party seller) from the get-go, and create the note itself, with you acting as agent? I haven’t explored the self-dealing rules in that context, but I think both Tony(VA) and Karl Kleiner have successfully completed such transactions via MidOhio/Entrust.

John Hyre

IRA self-dealing solution? - Posted by James Buster

Posted by James Buster on July 01, 2002 at 23:57:14:

You normally cannot deal between your IRA and any business entity you control. Can the following defeat the self-dealing rules? Example:

Buy MH for $3000. Sell for $1500 down and $7000 note. Using John’s handy info, my business (corp/llc) values the note at $4000 FMV. Business owes tax now on $1500+4000. Problem: business needs cash to pay tax, ongoing business expenses, and do more deals. Sheltering future income from the note would be nice, too. Answer: sell note for $4000 to unrelated party. Said party sells note for $4000+X (X = de minimis value to compensate party, say $100) to my self-directed Roth IRA. Everybody is happy: my business has a source of cash to continue funding deals, the third party is getting $100 for ten minutes of signing papers, and my IRA is getting a good yield and reasonable safety (since, I hope, I practice good business!) on notes it buys. As long as there are 2 separate transactions and your IRA didn’t foolishly table-fund the third party the IRS shouldn’t even blink, especially since you gave them the above Good Business Reasons for selling your note.