From the desk:Self-Directed IRA (Real Estate)

45 percent IRA and 55 percent my own cash on one lot, and my attorney needs a week

Under contract on a 6.2 acre infill parcel at $340,000 in a growth path suburb. The seller wants a 30 day close and won't split it.

My Roth SDIRA has $154,000 available. I have $190,000 in a taxable LLC I've used for two prior land deals. So the natural structure is tenants in common, IRA takes 45.29 percent, LLC takes 55.71 percent, deed reflects both, everything after that gets split at those exact percentages forever.

What I've confirmed: the custodian will hold an undivided TIC interest and has done them before. Their fee is $325 a year plus $95 per transaction, which on a land deal with almost no transactions is cheap.

What I can't get a clean answer on is whether the initial co-investment is itself a problem, since I control the LLC and I'm the IRA owner. Everything I read says a simultaneous purchase of undivided interests at proportional cost from an unrelated third party seller is a different animal than the IRA transacting with me. My attorney says the same thing with more hedging, and then says the exposure isn't in the purchase, it's in every single dollar that moves afterward. Which I believe, and which is why I'm posting.

Carrying costs are roughly $4,100 a year in taxes and a mow contract. Hold period is probably seven to nine years until the sewer line extension gets funded. Exit is a sale to a builder, hopefully in the low sevens.

Decision in front of me: sign the TIC structure, or buy the whole thing with the LLC and leave the Roth out of it and lose the tax-free treatment on the best appreciation asset I've got. Earnest money goes hard Friday.

Answer

2kevin_lombardPG1BPRO5

I'm new enough that I read this thread twice, and the part that stuck out isn't the purchase. It's the exit.

If you and the IRA own it together, you both have to sell at the same time, to the same unrelated buyer, at the same price per percentage point. You can't buy the IRA out later when the builder offer looks good and you'd rather have the whole thing in the LLC. You can't refinance one side. And if the builder wants to option 3 acres instead of buying all 6.2, that gets complicated because the option has to be against the undivided whole, not against your half.

So the question I'd ask your attorney in the week he's asking for isn't whether the purchase is clean. It's whether every plausible exit is clean. Seven to nine years is long enough for the plausible exits to change shape, and you're locking both owners into moving in lockstep the whole time.

The carry money @anchor raised is the other thing. That's a real number you have to fund from inside the account and you can't top it up beyond contribution limits.

3 replies

1ehernandez74PO2BPRO5

Seven to nine years of carry with the IRA funding 45 percent of $4,100 a year is about $1,850 annually out of the Roth, plus the custodian fee. Where's that coming from? You said the IRA has $154,000 available and the buy is $154,000 of it. If the IRA can't pay its share of the tax bill on time and you pay it, you've got the exact problem your attorney is warning about, on year one.

I'd size the IRA share at whatever leaves twelve years of its own carry in cash. Which probably means the IRA takes 38 percent, not 45.

1brandonlee36Passive

@juniper naming the exit is the right catch, and I'd push it further. Ask about partition rights too. If something happens to you personally and the LLC interest goes to an estate, your IRA is suddenly co-owned with people who aren't you.

Small practical thing from running a TIC once: get the tax bill split at the county level if your county will do it, so each owner gets a separate bill for their percentage. Mine wouldn't, so one owner paid and the other reimbursed, and reimbursement is exactly the mechanic you can't use here. That detail varies county to county and it's worth a phone call before Friday.

Honestly at 30 days with an attorney who wants a week, I'd be asking the seller for an extension rather than signing into a structure I can't unwind.