[WSBARP] Using Self-Directed IRA for Real Estate Investing

Fri Nov 21 08:29:37 PST 2014

Eric,

I stand corrected – 49%, 49% and 2%.

Haven’t gotten any responses as set.  Also stumbled upon the below ERISA
Opinion Letter though not directly on point – helpful as to understanding
the “form over substance” issues.

*Robert R. Rowley* | Attorney at Law

505 W. Riverside Ave, Suite 500

Spokane, WA  99201

Telephone: (509) 252-5074

Mobile: (509) 994-1143

Facsimile: (509) 928-3084

Email: rob at rowleylegal.com

Web Site: www.rowleylegal.com

*ERISA Opinion No. 2006–01A*
A lesson to be gleaned from this opinion is that a prearranged transaction
which is contingent upon the investment of an IRA may be a PT. This opinion
letter involved an S Corporation that was 68% owned by a married couple
(the "Berrys") as community property and 32% owned by a third party,
George. Mr. Berry proposed to create a limited liability company ("LLC")
that would purchase land, buy a warehouse and lease the real property to
the S Corporation. The investors in the LLC would be Mr. Berry's IRA (49%),
Robert Payne's IRA (31%) and George (20%). The party requesting the letter
represented that S Corporation was a disqualified person under Section
4975(e)(2). (This representation apparently was based on the fact that the
Berrys were the majority owners of S Corporation.)

The Department cited Labor Regulation section 2509.75–2(c) and ERISA
Opinion No. 75–103 for the proposition that "a prohibited transaction
occurs when a plan invests in a corporation as part of an arrangement or
understanding under which it is expected that the corporation will engage
in a transaction with a party in interest (or disqualified person)." Based
on that authority, the Department reasoned that since Berry's IRA invested
in the LLC with the understanding that the LLC would lease its assets to
the S Corporation (a disqualified person), the lease would be a prohibited
transaction and Berry, as a fiduciary, would be in violation of PT rules.
(Although it was not mentioned in the Opinion, the clear implication is
that the Berry IRA would be disqualified as a result of such PT.)

Mr. Berry may have believed that the PT issues would be satisfactorily
addressed by structuring the LLC as a real estate operating company (a
"REOC"). Under the authority regarding "plan assets" (Labor Regulation
section 2510.3–101), a REOC is a particular type of business entity that is
structured so as to not be deemed to hold the assets of a plan investor
such as an IRA. If a REOC is properly established, ordinarily a transaction
between a REOC and a disqualified person would not be a PT because the
transaction would not involve the use of plan assets.

Because Mr. Berry "exercises authority or control over its assets and
management," the Department determined that Mr. Berry was a fiduciary to
his own IRA, and as such, a disqualified person with respect to his IRA.
The Department concluded that a lease of property between the LLC and S
Corporation would be a prohibited transaction under Code section 4975 as to
Berry's IRA. As indicated in the Opinion, the Department perceived a
problem in the decision to establish the LLC as both a vehicle for IRA
investment and as a lessor of real property to the S Corporation. Mr. Berry
was the IRA owner and also the majority owner of S Corporation, the entity
that would lease the real property from the REOC. Consequently, in the
Department's view, the investment by Berry's IRA in the LLC was itself a PT.

If properly structured, it is permissible for an IRA to invest along with
related parties. ERISA Opinion 2000–10A addressed such a co-investment
structure, and comparison between the two rulings is instructive. The
approach taken in ERISA Opinion 2000–10A yielded an acceptable
co-investment opportunity without running afoul of the PT rules. In sum, an
individual who had an existing interest in an investment partnership wanted
his self-directed IRA to co-invest with the partnership. The pool of assets
that would be available in the co-invested entity would be large enough to
secure the services of a particular investment adviser.

*From:* wsbarp-bounces at lists.wsbarppt.com [mailto:
wsbarp-bounces at lists.wsbarppt.com] *On Behalf Of *Eric Nelsen
*Sent:* Thursday, November 20, 2014 3:46 PM
*To:* WSBA Real Property Listserv; WSBA RPPT Probate & Trust Discussion
Forum
*Subject:* Re: [WSBARP] Using Self-Directed IRA for Real Estate Investing

I don't know the answer, but that's only 99% worth of interests. Is the
third member 2%?

Sincerely,

Eric

Eric C. Nelsen

SAYRE LAW OFFICES, PLLC

1320 University St

Seattle WA  98101-2837

phone 206-625-0092

fax 206-625-9040

*From:* wsbarp-bounces at lists.wsbarppt.com [
mailto:wsbarp-bounces at lists.wsbarppt.com <wsbarp-bounces at lists.wsbarppt.com>]
*On Behalf Of *Rob Rowley
*Sent:* Thursday, November 20, 2014 3:16 PM
*To:* WSBA RPPT; WSBA RPPT Probate & Trust Discussion Forum
*Subject:* [WSBARP] Using Self-Directed IRA for Real Estate Investing

Would like to hear from counsel who has experience using a self-directed
IRA for real estate investing. I am familiar with the great RPPT article
from the summer and am using it.  Do have some prior experience with the
practice in the context of ‘hard money loans’ with no ‘disqualified’
individuals but have a more of a technical question.

Using an LLC where there are three members and one of the members has a 49%
interest, the second member has a 49% interest and a third member has a 1%
interest.  All three members are unrelated.  Having one of the 49% interest
members borrowing money from a lineal ancestor using a self-directed IRA..
Normally would be problematic because the borrower would be a “disqualified
individual". 26 USC 4975(e)(2). The 49% rule from 26 USC 4975(e)(2)(G),

Thanks.

*Robert R. Rowley* | Attorney at Law

505 W. Riverside Ave, Suite 500

Spokane, WA  99201

Telephone: (509) 252-5074

Mobile: (509) 994-1143

Facsimile: (509) 928-3084

Email: rob at rowleylegal.com

Web Site: www.rowleylegal.com

Practice concentrated on business, real estate and general legal matters in
Washington and Idaho.

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