I have a question for you "experts" regarding the SD 401k/IRA. I had a friend ask me this question and I am not that familiar with this tool.

Question is: Can an uncle, purchase and put up the money for all repairs of a property then sell it to his nephew? Since it would be a non arms length transaction and it would be sold with a gift of equity, is this an allowable transaction? The nephew would most likely be involved with helping do some of the rehab as well.

MJ,

SD401k is a beautiful thing so don’t mess it up. It is sooo easy to mess it up, often with good intentions. Seek professional advice.

GENERALLY SPEAKING a vertical relation is excluded (ancestors and descendants) but side relations (brother, sister, uncle, friend) are legit. No relations are the easiest. No one with a fiduciary connection.

So...the terms uncle and nephew are vague. Nephew to whom? Need more info. Is this a man wanting to sell to HIS nephew?

But the nephew participating could lead to trouble.

And selling with a GIFT of equity is troublesome to my thinking.

Consider making a loan to the nephew rather than being involved on the deed.

THIS is exactly why I use Mike Todd at IRA Innovations. I can run such scenarios past him. 615-794-8961

MJ,

SD401k is a beautiful thing so don’t mess it up. It is sooo easy to mess it up, often with good intentions. Seek professional advice.

GENERALLY SPEAKING a vertical relation is excluded (ancestors and descendants) but side relations (brother, sister, uncle, friend) are legit. No relations are the easiest. No one with a fiduciary connection.

So...the terms uncle and nephew are vague. Nephew to whom? Need more info. Is this a man wanting to sell to HIS nephew?

But the nephew participating could lead to trouble.

And selling with a GIFT of equity is troublesome to my thinking.

Consider making a loan to the nephew rather than being involved on the deed.

THIS is exactly why I use Mike Todd at IRA Innovations. I can run such scenarios past him. 615-794-8961

MJ,

SD401k is a beautiful thing so don’t mess it up. It is sooo easy to mess it up, often with good intentions. Seek professional advice.

GENERALLY SPEAKING a vertical relation is excluded (ancestors and descendants) but side relations (brother, sister, uncle, friend) are legit. No relations are the easiest. No one with a fiduciary connection.

So...the terms uncle and nephew are vague. Nephew to whom? Need more info. Is this a man wanting to sell to HIS nephew?

But the nephew participating could lead to trouble.

And selling with a GIFT of equity is troublesome to my thinking.

Consider making a loan to the nephew rather than being involved on the deed.

THIS is exactly why I use Mike Todd at IRA Innovations. I can run such scenarios past him. 615-794-8961

Self directed 401........ you want jail time-- mess with the IRS on this and that's what you'll be facing.

MYOB - really - you're great with passive aggression.

Thanks Brad, I was hoping you would respond. That is the general type info I was looking for. I just wanted to give these folks a place to start. Your comments/suggestions give me enough pause to tell them to reconsider this option for this transaction.

MYOB - I clearly wasn't suggesting or trying to circumvent the law on this. Not sure why you made those comments. I asked the question to get some guidance on whether this was worth pursuing for these folks. They are brand new to investing and I don't have enough knowledge about this product to advise. Brad pointed me in the right direction.

Check in with your administrators. I believe the arm length test is one relative up or down (parents, kids) and one across (brothers/sisters).

You do need to be paying fair market value for the assets that you buy using any SD program. My idea of fair market value is different than a retail buyer.

If you are dabbling in the gray in one area and couple that with some more gray in another - I would think you need to ask yourself how badly you want an audited.

3 men in our town were telling people you could pull your money out and invest in rentals-- and be the LL and self direct 401 in this purchase of RE on the court steps. He took his 10K and next thing you know-- he's locked up.

The head man got 3 years in federal prison and forfeited mil ions and his 2 buddies get 2 years each.

Sometimes when trying to keep people from making a BIG mistake advising -- you have to be aggressive.

I told this guy many times to stop doing it cause it was illegal what he was doing--- just had to keep pushing it and some one dimed on him and his crew.

Now anytime I hear this 401 stuff it makes my skin crawl.

Disqualified persons include (among other persons) your vertical lineage: parent, grand parent, great grand parent, spouse, son/daughter, grandchild, great grandchild. Your Self Directed 401k, SEP, or IRA canNOT do business with these people.

MYOB, you do NOT "pull your money out" of your IRA and buy RE. Well you can, but then it is a distribution and is taxed and possibly penalized as such.

You transfer your money to a Self-directed IRA Custodian (Equity Trust, Mike Todd, etc.) and THEY purchase your investment "FBO" (For the Benefit of...) your IRA using your IRA funds. You never touch the money. ANY of the money. Rents are paid back to the IRA account, bills are paid out of the IRA account. Should you take possession of any of the money at any time, even for a short time like taking cash for rent and sending it on, that is a disqualified transaction.

Spouses CAN pool their IRA money to purchase real estate, but it is all handled totally separately: everything, including expenses and income, is divided according to the percentage owned by each IRA (50/50, 25/75, 60/40) and must be meticulously handled that way. The deed is titled (for instance) ETC FBO XXXXXIRA 50% and XXXXXIRA 50%" or similar wording.

Even a $30 lawn mowing bill must be divided appropriately and paid out of the appropriate account. So for every bill, two checks or more.

You can't work on it, your spouse can't work on it, up and down blood relations cannot (grandparents, kids, grandchildren) but STEPCHILDREN and STEP-GRANDCHILDREN can, and brothers and sisters may as well. I don't know about nephews, but if your sister and brother can, it seems possible (don't KNOW) that their kids could?