Opening a Self-Directed IRA And Understanding Prohibited Transactions

For the full video webinar visit: https://directedira.com/opening-a-self-directed-ira/
For more details on prohibited transactions download the Self-Directed IRA Handbook (look for chapters 4, 5, 6, and 7): https://directedira.com/the-self-directed-ira-handbook/

Most Self-Directed IRA investors worry about choosing the right asset, but the real danger is accidentally breaking an IRS rule you didn’t even know existed. Watch Mat Sorensen (CEO, Directed IRA) and Lindsay Mersino (Executive Director of Operations) host a brand-new session that breaks these rules down clearly, simply, and with real examples you won’t find anywhere else.
     
You’ll Learn
- What a Self-Directed IRA can invest in
- The three investments IRAs cannot hold
- How IRS prohibited transaction rules actually work and the real mistakes that cause penalties
- Who counts as a “disqualified person” and why this matters for every deal you structure
- The three types of prohibited transactions
- Deal examples that stay compliant vs. deals that disqualify an IRA
- How to safely structure alternative investments through your SDIRA

Why Directed IRA?
At Directed IRA, we’ve helped thousands of investors put over $3 billion into real estate, private funds, notes, and more, all inside tax-advantaged retirement accounts. Our team of experts and streamlined platform make it easy to invest with confidence.

Directed IRA Homepage: https://directedira.com/

Directed IRA Explore (Linktree): https://linktr.ee/SelfDirectedIRA

Book a Call: https://directedira.com/appointment/

Other:
Mat Sorensen: https://matsorensen.com & https://linktr.ee/MatSorensen
KKOS: https://kkoslawyers.com
Main Street Business https://mainstreetbusiness.com

Episode Transcript

SPEAKER_01 (00:06):
Welcome everyone to the Directed IRA webinar and a
special Directed IRA podcastepisode.
This is Matt Sorns and I'll beyour tour guide today.
I'm an attorney CEO at DirectedIRA.
And I'm joined by the great andfabulous Lindsay Mercino.
Let's show her on camera there.
All right, there we go.
Look at that.
So cinematic.
And Lindsay's going to behelping with some questions.

(00:26):
She's been in the space for 10plus years.

SPEAKER_00 (00:28):
13.

SPEAKER_01 (00:29):
13?
Wow.
So um, but she's a pro, superknowledgeable.
So between the two of us, we'regoing to try and get through a
lot of content, but also yourquestions.
So if you have questions, um, welike to say use the chat and QA,
but nobody follows rules.
So we'll be checking both.
Um, keep please keep in mindthough that this webinar will be

(00:49):
recorded.
So if you've missed any piece ofthis, you got something else
going on, or you want to rewatchthis and relive the great
moments, the hits, um, it'sgoing to be recorded and posted
to directedira.com/slashwebinars.
All right, well, let's jump intothis.
Now I want to level set foreverybody that before we dig
into primitive transactions tomake sure you understand what a
self-directed IRA is.
This is your IRA account.

(01:10):
This could be traditional IRA,Roth IRA, even a health savings
account, solo 401k, there's lotsof different account types.
This is an IRA that can own realestate, crypto, a private
company, a small business, anote.
You can lend people money.
Okay.
Your IRA can own a stock or amutual fund, which is what
you're doing with your brokerdealer IRA, but a self-directed
IRA can own these private,sometimes called alternative

(01:33):
assets.
So once you start getting intothat and you do that with an
amazing company like directedIRA, and there's, you know,
maybe 20 other companies that dothis, you just need to know the
number one company, directedIRA.
And um, but when you're doingthis, the number one thing you
need to know is something calledthe prohibited transaction
rules.
And that's our focus for today'swebinar is making you a master

(01:56):
of the prohibited transactionrules.
So you don't screw up youraccount.
Okay, because if you mess thisup, it can cause problems with
your account.
The nice thing is, it's not thatcomplicated.
And most of you don't reallyactually need to worry about
this, but some of you do.
Some of you like to get creativeand structure things and some
deals that might come acrosswhere this is a rule you need to
know.
Now, I always tell peoplelearning the primitive

(02:19):
transaction rules is not rocketscience.
It's more like learning a boardgame.
You just don't need to know therules.
And then once you learn therules, it's the same thing over
and over and over again.
So don't feel like you need tolike, you know, master this um
to a complex level.
Just know about what you do andum understand the rules that are
going to apply in yoursituation, the types of things

(02:40):
that you're investing in.
Okay, now we do have a slidedeck too.
I think we'll share that here,um, or at least it'll be posted
on the uh webinar page atdirectaria.com slash webinar
once the recording goes up.
This is helpful because we dohave a lot of detailed
information on these slides.
Uh, and I've wrote a book onthis.
We have tons of resources on ourwebsite as well.

(03:01):
Uh, so we just want to make sureyou have enough educational
resources if you want to um divedeeper on this.
Also, if you've got like thatCPA or the lawyer or financial
advisor that's like, we want todo what with your IRA?
And you want to give them someammo with like some tax code
citations and cases, we havethat here for you too.
So, and for any of you CPAs orattorneys on here, you know, we
gave those for you guys as well.

(03:23):
Okay, enough commentary.
Um, anything we else need to sayon QA or questions, Lindsay.

SPEAKER_00 (03:29):
Drop it in the chat, guys.
Uh, we have Michelle who'sjoining us live as well.
So Michelle will drop hercalendar link in the chat just
in case you guys want to set upa call with her.
Pick her brain one-on-one.
It's completely free to book acall with us.
So do so.
And if you do decide to open upan account, we've also got an
awesome promo this week.
So uh ask Michelle about that.
And we'll also uh share with youguys what that promo code is

(03:51):
here shortly.
But make sure that you drop thatin the chat.
Check the chat for her link andbook a call today.

SPEAKER_01 (03:56):
Yeah.
All right.
Well, let's dig in here.
So the first thing when we'retalking about the prohibited
transaction rules, you need tounderstand is this isn't about
what your IRA can invest in.
This is about who your accountcan transact with.
If we think about what your IRAcan invest in, there are only
three things that are on the youcan't invest in this list.

(04:17):
So let's go to the slides here.
I got those on the list here.
The first is collectible items.
Your IRA cannot invest in acollectible.
Now, this would include like anart collection or a stamp
collection, coin collection,certain precious metals like
American Eagle coins, like gold,silver, platinum, palladium,
those are actually excluded fromthis rule.

(04:37):
So you can't own like anAmerican Eagle coin, for
example, in your IRA.
But otherwise, like theKruegeran or the collectible
coin, the I don't know, the theI don't know, pneumatic.
What is the word?
Pneumismatic?
I don't know.
Yeah, something like that.
That sounds right.
You know, these collectiblecoins.
I don't know.
Um, I want to say the nerdy coincollector thing.

(04:59):
I don't know what that is, butthere's value in that.
People collecting my grandpa didit.
You can't own that in your IRA.
All right.
Um, life insurance.
I'm trying to walk it back outof that one.
I pissed somebody off thatcollects coins.
I'm sorry.
Uh, life insurance, your IRAcan't own life insurance.
401ks actually can, IRAs can't.
Nobody came here to learn aboutthat.
And then S corporation stock.

(05:20):
So IRAs can own C corporationswhen you your IRA buys stock in
a publicly traded company.
That's a C corporation.
Your IRA can own that.
It can own a small business Ccorporation.
Your IRA can own LLCs or limitedpartnerships, which is what it's
doing if it invests in a smallbusiness or a private fund or
doing an IRA LC.
Your IRA can own those.
It's just S-corporations.
IRAs don't qualify as anS-corporation shareholder.

(05:44):
It's really an S-corporationrule.
S-corporations must be owned byindividuals.
An IRA is not an individual, soit doesn't qualify.
All right, that's it.
Everything else is fair game.
Your IRA can own the duplex downthe street.
It can invest in a private fund.
It can invest in a smallbusiness in your community.
It can invest in the nextgreatest startup that can happen

(06:04):
out of Silicon Valley.
Whatever.
You could private lend it toother real estate investors or
other business owners.
All these things are assets yourIRA can own, even crypto and
precious metals.
Okay.
Those are all things that yourself-directed IRA can own.
All right.
So since the world is youroyster and you can invest in
anything you want, we're reallynot here to teach you about what
your IRA can or can't own.

(06:26):
What you need to know is theprimitive transaction rule,
which is about who can theaccount transact with.
So for example, if my IRA isbuying a duplex down the street,
who's selling the duplex to myIRA?
For example, the first personthat is restricted here that you
couldn't transact with isyourself.

(06:46):
So you can't sell the realestate you personally own, that
duplex down the street, to yourIRA.
That would cause this thingcalled the prohibited
transaction.
Now, that's a quick examplehere.
We're going to break down therules on how that works, but
it's all about who is theaccount transacting with.
And that's the first level hereof what is a prohibited
transaction.

(07:08):
All right, so uh the first thinghere is you don't want to have a
prohibit transaction.
Primitive transactions are bad.
You end up losing your account,it gets distributed, and your
account's subject to penalties.
So don't have a primitivetransaction because you lose
your account and all the taxbenefits and privileges of it.
Now, in today's uh webinar,we're gonna go over three types
of prohibited transactions.

(07:29):
There's three differentvarieties that this could hit.
And you have to actually learneach, all three of them, because
sometimes you'll say, well, thisisn't one type, but it is the
other.
Um, so we're gonna go over eachof these.
There's per se, extension ofcredit, and self-dealing.
These are the three differentvarieties of prohibited
transaction.
All right, so let's go to thefirst type, which is a per se

(07:54):
prohibited transaction.
Now you have what is called aper se prohibited transaction
when you have three thingsoccur: an IRA transact with a
disqualified person.
Well, the whole reason to have aretirement account here is we've
already got one.
We have an IRA.
If I'm gonna make money, I'vegot to transact it.

(08:16):
So it's really about is theother person in the transaction
a disqualified person?
Right?
I'm gonna have an IRA go investin something.
If I buy real estate, it's gonnahave a tenant in it.
If I invest in a startup,someone already owns it or is
gonna run it.
So we're looking at who else isinvolved in this transaction and
is there a disqualified person?

(08:37):
So I gave the example earlier,my IRA is buying a duplex.
Who's the seller of thatproperty?
It's my father.
My father is a disqualifiedperson to my IRA, or I'm a
disqualified person to my IRApersonally.
So that would cause a per seprohibited transaction.
So the question becomes well,who is a disqualified person

(08:58):
under the rules?
Well, here's the list.
Okay, anyone here in red is adisqualified person your IRA
cannot transact with.
And it starts with you.
You're disqualified to your ownIRA.
Your spouse, your kids, yourparents, your son-in-law, your
daughter-in-law.
Um, for any of you in Utah, allyour spouses, okay, they are all

(09:22):
disqualified persons under therules.
Now, if you look there in greenon the list in the diagram here,
those are people that your IRAcan transact with.
These are family members thatare actually not disqualified.
So, for example, my brother orsister.
So let's say that my sister'sdoing a fix and flip property.
She's a real estate investor,and she needs a loan for a

(09:43):
hundred grand to fund the rehab.
And I'm like, I could lend mysister a hundred grand on the
rehab.
I'll get a note.
She'll pay me 12% interest andtwo points for the loan.
And I'm gonna put a lien on theproperty to make sure she pays
back my IRA.
That would be totally fine.
Okay.
My IRA is lending her money,that's a transaction, but she's
not a disqualified person.

(10:03):
So it's okay.
Obviously, there could be somethird-party investor.
I don't even have to worry aboutthese rules if it's just some
unrelated third party that Idon't even know who the hell
they are until we met for thisdeal.
So, but a lot of people willsay, well, family's
disqualified.
Or you'll read online, you go onto Chat GPT and you say, Who's a
disqualified person to my IRA?
Family members.
Not really.

(10:24):
It depends on who in the familythey are.
Okay.
So remember anyone in greenthere, brothers, sisters, aunts,
uncles, cousins, they're allfair game.
The red ones, that means stop.
Do not transact with them.
I tried to do red and green,keep it simple here.
So that's who is disqualified.
Now, transaction can be a lot ofthings.
So let's say, and I'm just gonnagive real estate examples

(10:45):
because they're the easiest, butit could be like a company or
stock.
Another common one we'll get ishey, Matt, I own these shares in
this company.
I've got options at this companyI work for, and they're pretty
valuable now.
They've gone up in value andthey're in my name, but I want
to have my Roth IRA buy them.
How do I get my Roth IRA to buythem?

(11:06):
Well, that would be a prohibitedtransaction.
You can't do that because thatwould require your Roth IRA to
buy them from you personally,which would be a transaction.
And now you've just engaged in aprimitive transaction.
That would be a per se primitivetransaction.
So no matter what the asset typeis, just remember any
transactions, buying or selling,even leasing.
So let's go back to the example.

(11:28):
Let's say that, let's say thatmy IRA just buys real estate,
some third party, and and I'llget this question every once in
a while.
Hey Matt, my kid's going off tocollege and I want to buy a
rental property in the collegetown.
It's a pretty good little rentalmarket, and my kid will stay
there as the tenant.
Well, that's a per se prohibitedtransaction, too.
And they'll say, well, um andhere's why it's prohibited, by

(11:49):
the way.
It's your IRA that owns it, it'sleasing the property, so it's
collecting rent from your son.
And really, you're probablypaying for it anyways, but you
know what I mean.
So, like, even if you weregiving the money to your son and
they're paying it, they're onthe list of a disqualified
person.
Okay.
So that would cause a per seprivated transaction because
they're paying rent.
Then I'll have clients say,Well, Matt, what if they stay

(12:10):
there and they don't pay?
It's not a per se privatedtransaction, huh?
Correct.
It's not.
There's no transaction.
They're staying there for free.
But there's something calledself-dealing.
See, this is why you got tolearn all the rules.
So we'll get to what is aself-dealing privated
transaction here in a second.
So just because I don't have aper se privated transaction
doesn't mean I'm in the clear.

(12:31):
I got to make sure I get thesethrough these other two
varieties, extension of creditand self-dealing, before I know
I'm totally in the clear on theprimitive transaction rules.
Okay, now one question thattypically comes up right now is
well, Matt, when is a company adisqualified person?
What if I have an LLC that ownsa piece of real estate and I

(12:53):
want to sell that property to myIRA?
Well, the way a company isdisqualified is if 50% or more
of the ownership of the companyis owned by disqualified
persons.
And this is actually 50% of thecapital, the ownership or
management of the company,either of those three is over
50% of disqualified people.

(13:14):
That's you, your spouse, yourkids, your parents, right?
Any of the individuals, if theyown 50% or more of that LLC
corporation, whatever thecompany is, the company is now
disqualified.
So if it's just me that owns anLLC 100%, or me and my spouse
that owns an LLC between the twoof us, we own 100% of it, that
company will be disqualified tomy IRA.
But let's say instead, though,that me, Lindsay, and Angel

(13:40):
here, the three of us, let's saythe three of us set up an LLC,
we bought a fix and flipproperty, and we each own one
third.
We all just work together, we'renot family or anything like
that.
And let's say we want to sellthe property now.
And I'm like, hey, I actuallythink that'd be a great rental
property for my IRA.
Could my IRA be the buyer ofthat fix and flip property?

(14:04):
Yes, it could.
It's not a per se primitivetransaction.
I only own a third.
66% of the ownership, Angel andLindsay, is non-disqualified
people.
Okay.
Now if I change the facts, andlet's say it was me, my spouse
and Lindsay that each owned athird of the LLC.

(14:24):
Now me and my spouse total, ourownership, each a third, were
66%.
We've gone over 50%.
So now the LLC becomesdisqualified.
Okay.
So for LLCs or corporations orentities, that entity becomes
disqualified based on this 50%rule.
All right.
Okay, let's see if there's anyquestions at this point on who's

(14:45):
a disqualified person that wewant to bring up or not, or just
primitive transactions, we stillgot to hit extension of credit
and self-dealing primitivetransactions.

SPEAKER_00 (14:55):
Yeah.
So we've got a couple ofquestions.
Russ is asking, can a Roth LLC,so I'm assuming that's a Roth
IRA LLC, can my Roth IRA LLC owna vehicle that I use for
business?

SPEAKER_01 (15:08):
Ooh, great question.
Good question.
The primitive transaction rulesfor your Roth IRA or Roth 401k
apply to any LLC it owns aswell.
So if you have an IRA LLC,checkbook IRA, um, all those
primitive transaction rulesapply to the LLC.
So if it buys a vehicle, youcan't use it.
Now we have had clients do likeToro or things like that, where

(15:29):
they've had an LLC that owns avehicle for that's that they
lease out on Toro.
So that wouldn't be prohibitedif you're renting it out to
third parties.
Um but if you're personallyusing it, that would cause a
prohibited transaction.
Now let's think about this.
If you're like, well, the Rothbought it, but I'm using it,

(15:52):
there's no per se prohibitedtransaction because I didn't
transact, right?
Now if I paid my IRA L L C forit, that would be a transaction.
But why is this a um prohibitedtransaction?
Well, this is self-dealing.
Let's actually jump toself-dealing and we'll come back
to extension of credit.

(16:12):
Because this is a good question.
A self-dealing prohibitivetransaction occurs whenever you
have a disqualified personbenefit from an IRA's
investment.
That's the easiest way to thinkabout it.
Does it did a disqualifiedperson benefit because my IRA
made an investment?
And here, with your IRLC thatbought a car that you use, well,

(16:34):
you're a disqualified person.
You're benefiting because you'reusing assets you're IRA owned.
All right.
So that would cause aself-dealing primitive
transaction.
The other one is like thevacation rental property.
Let's say that your IRA or yourIRLC, the rules are the same
here.
This could be Roth, traditional,SEP, doesn't matter the account
type.
Let's say that it owns an Airbnbproperty, and you're like, well,

(16:56):
no one's gonna stay there for aweek.
Why don't I just go stay therewith my family?
You know, I'm not gonna payrent.
That I know that would beprohibited, but I'm just gonna
use it because it's just gonnasit there vacant, Matt.
There's no there's no harm, nofoul.
Well, you've benefited fromusing the property.
So that would actually cause aself-dealing primitive
transaction because you're adisqualified person.

(17:19):
So now a question a lot ofpeople raise after I give that
example.
Sorry, I've been teaching thisfor a long time, is what if my
brother stays there, Matt?
What if my brother stays therebecause and they don't pay any
rent?
He's not a disqualified person.
Can we do that?
Sure.
Your brother could stay there.
I don't care, I guess.
I mean, it's not they're notdisqualified, so they could have

(17:40):
self-dealing in their favor, Iguess, you know, if you want to.
Um, like, what if my brotherstays there and he invites me
over?
Okay, now you're we're back toyour benefiting from use of the
of the asset or benefit from theinvestment.
Okay, another example ofself-dealing, and the
self-dealing is kind of trickybecause it's subjective.

(18:01):
The first variety of per se isIRA, transacts, disqualified
person.
It's like very objective.
Like we know who's adisqualified person.
A transaction is pretty much anytime money's going in and out of
the out of the account tosomebody or some company.
That's gonna be a transaction.
And obviously, we have an IRA,otherwise we wouldn't be talking
about this.
So it's really objective to likefigure out per se.

(18:24):
Self-dealing, though, issubjective because did a
disqualified person benefit?
You know, it's it can be verysubjective.
But use of assets is gonna bepretty clear.
Whether that's a car you buyfrom an IRLC or the Airbnb that
you actually stay in, that'sgonna be clear you're benefiting
because you're having use of theassets the account owned.

(18:45):
Another way you can getself-dealing is if you get
compensation because the IRAinvested.
So, for example, let's say thatyour IRA goes and buys the
duplex, okay, the rental, thesingle family rental, whatever,
it doesn't matter.
It buys a piece of real estateas an investment asset.
And let's say you happen to be areal estate agent.
So you receive the commission onthe purchase of the asset.

(19:07):
You get a 3% buyer's agentcommission.
The property was$300,000.
So you got a$9,000 commission toyou personally as the agent.
Well, you benefited because theIRA made a transaction.
You personally, at disqualified,benefited by getting that
commission.
So that would cause aself-dealing prohibited
transaction as well.

(19:27):
So now self-dealing, remember,this is um you're benefiting,
whether it's compensation, useof assets, but it has the same
ramification of the accountbecomes distributed, your
account's subject to penaltiesand interests.
If you're under 59 and a half,you have an early withdrawal
penalty.
If it's a Roth account and youhaven't had it for five years,

(19:49):
you're under 59 and a half, allthat get growth you've had in is
now taxable and subject topenalty.
And also any of the investmentsyou made after the primitive
transaction that you didn't haveto pay tax on are now subject to
tax as well.
So it's kind of like not good,obviously, to have a primitive
transaction, no matter the typehere.

SPEAKER_00 (20:11):
It's also not worth it to try and think that you're
being really sneaky.
That's also called potentiallytax evasion.
So let's not do that.
Let's not try to be sneaky.
If you're trying to think of aloophole, the IRS has probably
thought of the loophole andclose the loophole.
But call us and ask us thosequestions.
That's what we're here for.

SPEAKER_01 (20:29):
Yeah.
And we can help educate you, ofcourse.
If you want to get crazy andhave super complicated
questions, you need to call alawyer and have attorney-client,
you know, conversation aboutyour interesting ideas.
Um, so well, let's hit a couplethat we know are like, as um
Lindsay said, uh, these arecould be loopholes, but the IRS
is closed out.

(20:49):
For example, there's somethingcalled a stepped transaction,
which is something where yousay, hey, Matt, um I really want
to get this money out of my IRAand I was just gonna lend it to
myself or my business, but thatbut I'm a disqualified person,
so that'd be a prohibitedtransaction.
So what if I lend it to mysister?

(21:10):
Um, and then my sister will justgive me the money or she'll lend
it to me.
Would that be prohibited?
Yeah, that'd be prohibitedbecause that's called what the
IRS calls a step transaction.
Anytime you put an artificialstep in the middle of a
transaction to get around a taxrule, whether it's primitive
transactions or frankly anythingelse, the IRS blows through
that.
So they would really look atthat as if your IRA lent money

(21:33):
to your sister and your sisterjust gave it to you personally,
they're gonna see that you'rethere's no economic substance to
your sister being in thetransaction and that the
ultimate intent was you gotmoney from your IRA without
taking a distribution.
That's gonna be a primitivetransaction.
So don't try to put artificialsteps in the process to get
around a primitive transactionrule.

(21:54):
It will never work.
I was, I probably charge clientshundreds of thousands of dollars
as a lawyer for clients to finda way to get around the
primitive transaction rules.
Now, there's way they apply anddon't, and it's you can
definitely get a lot of adviceon what you can and can't do.
And sometimes there's grayareas, but this type of stuff of
like just putting somebody inthe middle of the deal to get

(22:16):
around the rule never works.
All right.
So don't try to do the deal withyour sister or brother.
Another one that I don't love,and this is where you start
getting the gray area, is let'ssay you're like, hey, um, hey,
Lindsay, you've got an IRA witha hundred grand in it.
I've got an IRA with a hundredgrand in it.
Why don't my why doesn't my IRAlend you a hundred grand and

(22:38):
then your IRA lends me a hundredgrand?
Neither of us have to take adistribution from our retirement
account.
We won't pay taxes or penalty.
That's a no-go either.
I won't be doing that.

unknown (22:48):
Yeah.
Sorry.

SPEAKER_01 (22:50):
Um, because now we're basically saying, well,
the only reason my IRA, the onlyreason my IRA would lend to
Lindsay is because Lindsay waspersonally going to give me
money.
So I'm personally benefitingbecause my IRA lend her money.
We're back to self-dealing here.
All right.
So I know some people getcreative with these ideas, but
in the end, if you're gettingpersonal benefit because your

(23:10):
IRA invested, it's just going tobe prohibited.
The benefit that should happenfrom your IRA's investment is
your IRA grows in value.
That's what you're focused on.
And you can benefit that way.
That's the whole point of thisthing.
But you can't personally benefitnow in your personal name.
All right.
And that's the big distinction.
So if you're like super focusedon just making great investments

(23:30):
and building wealth on yourretirement account, as you
should be, and most of you here,of course, is just think about
growing the retirement accountbalance and how to make good
investments.
Don't think about how you get tomake money now or how you get a
benefit because your IRA didsomething now.
Okay.
Another one we'll get, and I'lljust throw out, you know,
examples here.
We'll start taking some otherquestions too.

(23:52):
We still got to hit extension ofcredit and some, we'll hit
statute limitations.
How does the IRS discoverprimitive transactions?
We're going to hit those topicstoo.
Um, but another one that's kindof common, that's a little bit
of a gray area, too, is peoplesay, Well, Matt, I want to get
one of these golden visas inEurope.
Uh, you know, Portugal is apopular place.
And if I invest at least, youknow, 250 grand into Europe, I

(24:15):
can get a visa.
I can get one of these goldenvisas in my personal name and I
can go live in Europe full timeif I want.
Well, isn't that self-dealing?
If my retirement account makesan investment into Europe for
250 grand, and the only reason Iwas doing that was to personally
get a visa so I could personallylive in Europe full time.
Isn't that self-dealing?

(24:36):
Probably is.
Maybe there's a lawyer thatthinks it's not.
It sounds like self-dealing tome if that was the intent.
Um, now maybe you already madethe investment and had nothing
to do with you getting the visa,and now you're getting around to
it.
You're like, oh, maybe I'll golive in Europe for a year.
And the IRS can't tie those twothings together.
Could you get it get aroundthat?
Possibly.
Could that work?
Yes.

(24:57):
But the presumption from the IRSis the only reason you did that
was to go get the golden visa.
And so you're benefiting fromyour IRA's investment.
Okay, we could go on and on withexamples here, but let's see if
there's any other questions onself-dealing.
We'll still hit extension ofcredit here.

SPEAKER_00 (25:12):
Yeah, so just some just kind of general questions
regarding uh prohibitiveinvestments and disqualified
parties.
Uh, Wayne has a good one thatI'll take.
Uh, Wayne says, as long asyou're not purchasing from a
disqualified person, your Rothcan make the investment.
So almost.
Um, so you want to remember,Wayne, not only do you have to
look at the disqualifiedparties, but you also want to
look at the prohibitedinvestments as well.

(25:34):
So just keep in mind you can'tdo the life insurance contracts,
the collectibles, or the S-Corpshares.
That already uh is in play.
And but if those three are notyour concern or not what you're
considering, plus there's nodisqualified parties, then the
answer is likely yes.
Unfortunately, the IRS doesn'thave an all-inclusive list of
all the investments you canmake.
They only list the ones youcan't make.

(25:54):
So we presume fair game for therest.

SPEAKER_01 (25:57):
Um, which is actually nice.
In some ways, that's theproblem.
Is like like crypto, forexample.
Like, there's nothing in the taxcode that says your IRAs can can
buy crypto or not.
But it it only the IRS justtells you what you can't do,
right?
They don't tell you, you know,they just say the speed limit or
what you can't do.
That's what the law's all about.
So, like, well, how what doesthis mean?
I can I walk on the sidewalk?

(26:18):
There's no law that says I can.
Well, shit.
There's just a law that says youcan't walk in the road, okay?
Or like Jaywalk or run acrossthe street.
So, so this is just how the taxcode is built, too, with
primitive transaction.
There's not green lights of whatyou can do, there's just red
lights of what you can't do.
And then when it's a gray area,I call that like the caution
light or the yellow light, and Igotta look around.

(26:39):
I don't know, just and then youdetermine if it's good enough to
exactly.

SPEAKER_00 (26:42):
So it's really nice that we can just presume
everything else is fair game.
It's a lengthy list of what youcan actually do.
So don't get too hung up on theassets you can't buy or the
disqualified parties you can'ttransact with.
There are endless numbers ofdifferent types of investments
that you can invest in, andthere are millions and billions
of other people outside yourfamily members that you can

(27:04):
transact with and invest with.
So don't get hung up on the sixor seven that you can't invest
with, uh, or eight or nine ifyou're in Utah and have multiple
spouses.
Um but other than that, you'reyou're fair game to just slid
that one in.
I sold that one from Matt.
Um, the only other comment thatI wanted to uh share here is
from Anitha.
This is actually a good one.
I I haven't heard this onebefore, so I thought it was kind

(27:26):
of unique.
Uh Anitha asks, what are therules for prohibited
transactions and disqualifiedparties if you're over the age
of 59 and a half?
The rules don't change.
So the rules will always staythe same, regardless of your age
when it comes to prohibitedtransactions and disqualified
parties.

SPEAKER_01 (27:41):
Yeah, great, great question though.
Um the rules don't change, butthe penalty is different.

SPEAKER_00 (27:46):
There you go.

SPEAKER_01 (27:47):
So if you think about like if I have a
prohibited transaction, I'm 45,I am 45, right?
My account gets distributed.
I'm under 59 and a half.
So I have a 10% early withdrawalpenalty.
If this is my Roth account, anyof the earnings are now subject
to tax too.
It's like nasty, right?
But let's say I'm 62 and evenand I've had a Roth IRA for five

(28:09):
years, and I end up having anaccount.
My account has a primitivetransaction.
Well, I just that just asked,it's just the account's
distributed, no tax, no penalty,because I'm over 59 and a half.
Now I don't have a Roth IRAanymore.
That sucks.
Whatever was in that account isfully distributed.
And so I have had clients overthe years, and this was attorney

(28:29):
mat when I used to consultclients.
I don't do that now, but like uhhardly I do that.
But when I'm like if if I'madvising a client who's over 59
and a half, and I had to havemany that are have large Roth
account, we're always thinkingabout all right, if this there
is some gray area in atransaction, let's say, what is
the risk?
The risk is you don't have aRoth IRA anymore.

(28:51):
Now, one thing that's really,really important to understand
is the consequence of aprimitive transaction.
For IRAs, if you have, let's sayyou have a million-dollar IRA,
Roth traditional doesn't matter,but you engage in a$10,000
primitive transaction.
Well, the IRS distributes thewhole million-dollar account.
It doesn't matter.
There's only$10,000 involved.

(29:13):
For IRA rules, one primitivetransaction in the account, the
the consequence is distributionof the entire account back to
January 1st of the year when theprimitive transaction occurred.
And so it can be very risky ifyou're in a gray area here,
let's say, where is it aprimitive?
Is it not?
I don't know.
Maybe we can hit some gray areaquestions.

(29:33):
But so a strategy would be isseparate that investment.
If you've got the million-dollaraccount or the larger account
and you have a$50,000 investmentthat might be a gray area, you'd
want to put that$50,000 into anew IRA.
Let's say it's a Roth IRA, andit would make its own
investment.

(29:53):
That way, if something happenedin that and that was deemed a
primitive transaction, only atthat account that made the
$50,000.
Investment that doesn't haveanything else in it is
distributed.
Your other IRAs, your other RothIRA with us or other account at
Schwab or wherever, those arenot affected.
So it's only the accountinvolved in the primitive
transaction that getsdistributed.
But it is the whole thing.

(30:14):
So not that everybody needs todo that, and 99.9% of you don't
need to know that.
But if you have a lot ofcreative structures and
strategies where you can runinto gray areas a little more
advanced, that is a kind of ahigher account, more advanced
strategy to separate out youraccounts to limit the risk of a
privately transaction.
Because it is like the deathpenalty.

(30:34):
And I've even been involved inlobbying Congress, and there was
a there's a bill called the IRAPreservation Act that was
introduced in the House aboutsix or seven years ago, where we
were trying to change that ruleso that the penalty was only on
the amount involved, not on theentire account.
Which the that amount involved,by the way, is if you have a
401k, even a solo 401k, theconsequence of a primitive

(30:57):
transaction there is um only theamount involved is subject to
penalty.
And it's a 10, it's a 15% excisetax, and you have to correct the
primitive transaction.
So solo 401ks, any of youself-directing those, or just
any 401ks that areemployer-based plans that are
self-directing.
Um, it's a there's no deathpenalty on the whole account.

(31:19):
The consequence is just on theamount involved.
Okay, sorry.
That was a little legal east fora while.
Anyone still listening?
Is there anyone on still or dideveryone leave?

SPEAKER_00 (31:28):
No, you lost everybody, Matt, with all your
tax attorney chatter.
No excuse.
So that was very helpful.
And it's also awesome to hearjust about the lobbying that
you're doing as well.
So thanks for pushing that onyour end.

SPEAKER_01 (31:39):
Um we lost, but you know, whatever.

SPEAKER_00 (31:41):
We'll try again another time, right?
Um, no, I think everybody'sasking some really awesome
questions.
There's some really advanced andspecific ones too.
So way to go, guys.
It looks like we've got a reallygood uh audience here today.
We're super engaged.
So just keep in mind, too, thatif you've got some super
specific questions, book a callwith Michelle.
So we'll drop her calendar inthe chat here in just a second.
I just found out she's workingThursday and Friday, guys.

(32:03):
So book her for the holidays ifyou've got nothing else going
on.
You're home with the kids orjust trying to escape for a
little bit and take a littlequiet time, take a meeting with
Michelle, learn some more aboutself-directing.
And she's also got an awesomepromo for you guys, too.
I'm gonna give it to you rightnow.
So make sure you write thisdown, guys.
It is BF250, BF250.
It's gonna get you$250 off.

(32:24):
It's our Black Friday special,gets you$250 off the account
establishment.
So make sure you put that whenyou book a call with her, add
that promo code to the uh to theactual booking itself so that we
know you're one of those fromthe webinar.

SPEAKER_01 (32:36):
Yeah, and this will only go until Cyber Monday.
So that promo code is like wedon't do it that high ever.
So if you're gonna use it, useit now.
You got till Monday, till CyberMonday.

SPEAKER_00 (32:46):
Matt told us to do BF200.
We slipped in the 250, so don'ttell them, okay.

SPEAKER_01 (32:50):
Yeah, well, I just heard, but it's too late now.
Damn it.
Okay.
Um all right, well, let's comeback to extension of credit
primitive transaction because Ikind of skipped over that.
Um, this one's a little easierto understand, and we'll give a
good case example of it too.
So an extension of credit creditprimitive transaction occurs

(33:12):
whenever there is an extensionof credit between an a plan,
which means IRA, and adisqualified person.
All right.
So, for example, let's say yourIRA is buying real estate and
you have 100 grand in your IRA,but the property's 300 grand.
Well, you can get a loanactually to buy that property.
So the bank will lend 200 grandon it, but you can't guarantee

(33:35):
the loan.
You can't be the guarantor orhave your credit ran on that.
Okay.
That would cause this extensionof credit prohibited transaction
because now I've provided mypersonal credit and I'm a
disqualified person to benefitmy IRA and in the investment.
So when I'm getting loans forpurposes of an IRA, when I'm

(33:55):
buying assets or even improvingassets or whatever it may be, um
I can get a loan, but it needsto be something called a
non-recourse loan.
And there's seven or eight banksthat really specialize in these
and will do loans to singlefamily rentals.
You know, it doesn't have to besome big apartment or commercial
property.
In fact, most of the time it'sjust on single-family rentals,

(34:16):
where they will lend you moneyto your IRA or your IRA-owned
LLC.
They will lend it money to goacquire real estate.
Now, these need to beincome-producing properties
because there's debt servicethat needs to be met.
And they'll do this like kind oflike a they'll they'll have a
debt service coverage ratio, youknow, that it needs to meet,
which frankly, you'll want tomeet that, otherwise, it's a bad

(34:37):
rental property, anyways.
They want to make sure that therents that you should be able to
collect on this will cover thedebt service.
Also, these loans are going torequire about 30% down, um,
sometimes up to 40, depending onthe property or the lender.
Um, the reason for that is underthese non-recourse loans, in the
event of default, the bank can'tcome after you because you

(34:58):
didn't guarantee the loan.
They can't come after your IRAeither because that violates IRA
rules.
The only thing they can do isforeclose on the asset they lent
on.
So they can foreclose and takethat property back.
But if your IRA has other assetsor money in it, they can't come
after your IRA, nor can theycome after you personally.
So they're only recourses on theasset itself that they've lent
on.
All right.

(35:18):
Um, and that is a non-recourseloan.
Uh, lots of banks out there doit.
If you go to on directed on ourwebsite, there's a number of
lenders on there.
Um, it's under the resourcedirectory, I believe.
Yes.
If you go to directria.com andyou get to the resource
directory from our homepage,you'll see a number of banks
that you can contact there.
Also, for any of you that arecreative real estate investors,
or you're acquiring propertiessubject to or with seller

(35:41):
financing or whatever that is,that's fine too.
You can acquire properties thatway.
That your IRA or Roth IRA or IRALC is the buyer on that.
And you you take it subject tothe existing, you know, loan.
Um, and that, and then usuallyyou'll be using an IRA LC for
this, and the LLC is, you know,will be agreeing.
So this is your IRA LC, XYZInvestments LLC, will agree to

(36:05):
make those payments.
Um, or they'll agree to makethem to the seller of the
property, but you can'tguarantee the seller that the
LLC or your IRA will make thosepayments.
Okay.
That would cause this extensionof credit.
Now there was a big case on thisabout 10 years ago called Peak
and Fleck versus Commissioner.
Um, this was two guys that usedRoth IRAs actually, and they

(36:28):
formed a new company.
This new company, the solepurpose of this new company, it
was on 50-50 between their RothIRAs, was to purchase an
existing small business.
So they bought this existingsmall business, but when they
cut the deal from the personthat owned this business before
them, they said, Hey, we don'thave all the money to buy you
out of the business.
I think the business is like amillion bucks, a couple million

(36:51):
bucks to buy it.
Like, here's 500 grand that wehave between our Roth IRAs.
We'll pay you the rest overtime.
And so there's a seller financenote from the seller of the
business saying, Hey, I'm gonnasell you this business for three
grand.
I'm just giving, I don't knowthe exact numbers here, but
we're gonna sell you thisbusiness for three grand.
Sorry, three million.
Slight detail.

(37:12):
Selling this business for threemillion, but I'm gonna take 500
from you now, which could theRoth IRAs put into the new
company, and the new companypaid the seller 500 grand.
But you're gonna owe me 2.5million that you'll pay me over
the next five to ten years.
All right.
Now that was all fine.
You can do that.
However, the seller said, but Ireally want to make sure you

(37:34):
guys pay me back.
So I want you to guarantee thesenotes personally that you will
personally guarantee that youwill pay me back this extra
couple million dollars, plus I'mgonna put liens on your homes to
as collateral to make sure youreally pay me back because I
don't trust you.
I'm not just gonna take yourword for it.
Now, that is what caused anextension of credit prohibited

(37:56):
transaction because they agreedto personally guarantee the
seller finance note, and theyuse their personal homes, their
personal assets, as collateralfor the loan that was really for
their Roth IRAs.
Now, Peak and Fleck, bless them,they tried to fight this out in
tax court as they should.
There's some arguments they madehere that there was a company
involved in the middle and theytried to work around this with

(38:17):
the tax court.
They lost.
All right.
And um, and the tax courtbasically said your IRA
benefited and received creditextended from you personally
when you personally guaranteedthe note and used your personal
assets as collateral.
Now, here's what happened inthis case.
Their IRAs got distributed.

(38:38):
These were Roth IRAs.
The IRS didn't realize thisuntil they'd already sold the
business and made a couplemillion bucks.
So what happened is the IRSaudits them later and says, Oh
my gosh, you made over they eachover made over a million dollars
of profit in their Roth IRAsfrom buying this business,
improving it, and selling it fora profit.

(38:59):
But they came in, unwound thetransaction, realized that they
had guaranteed the debt toacquire it, caused a primitive
transaction.
And what happens is theprivative transaction goes back
to when they guaranteed theloans in the first place.
So the IRS said, you didn't haveRoth IRAs when you owned this
business.
So any of the profits you'remaking in the business, those
are actually taxable now.

(39:19):
And when you both sold it andthere was a couple million of
profit, each of your IRAs got amillion dollars of profit,
that's subject to capital gainstax now.
Because you don't have Roth IRAsanymore.
You had a primitive transaction.
All right.
So that's another angle of theconsequences here is if you have
transactions and investmentswhere you're making money, which
is the point here, those thingsactually become taxable now

(39:40):
because you don't you didn'thave an IRA at the point you
engage in a primitivetransaction.
So that's extension of credit.
Hopefully that example and caseis helpful.
Um, bottom line takeaway isdon't guarantee debt or pledge
personal assets as collateralwhen your IRA is getting a loan.
Work with a bank lender thatunderstands these loans.

(40:00):
Don't call your friend the loanofficer that does loans for LLCs
all the time if they don'tunderstand IRA and non-recourse
loan rules.
Also, if you're doing creativedeals with seller financing or
subject to, also just make sureyou're not personally
guaranteeing that.
Um, that will also cause aextension of credit privy
transaction, just like it didfor Peak and Fleck.

(40:21):
How are we doing on questionsnow?

SPEAKER_00 (40:22):
Yeah, full tax attorney honest, guys.
What a treat.
Uh so we do have some questions,but they're not necessarily
applicable to this particularsegment.
So we can still hit some ofthem, though, because they're
really good.
Uh Wayne's got another good one.
Wayne says, as a realtor, canthe commission benefit be rolled
into the purchase of the home,which benefits the IRA by
lowering the cost basis and nopayout to me.

SPEAKER_01 (40:42):
Yes, love that.
Great, great idea.
And that's what I would do.
Just reduce the purchase priceif you're the buyer by that 3%.
Either do it in the offer fromthe beginning.
That's probably the cleanest wayto do it.
Just say, hey, you know, I'm theagent, but I'm not taking the
commission.
Let's just reduce the purchaseprice by that 3%, or have it
credited back in closing.
Um, maybe your broker takes alittle bit of a fee, but
otherwise it would go to theagent that can just um be part

(41:06):
of the proceeds to purchase.
So your IRA can benefit.
That's the other thing.
Your IRA can benefit from yourIRA making an investment.
That's okay.
You just can't.

SPEAKER_00 (41:15):
There you go.
All right.
Um we've got a few more.
Let's see.
How about, ooh, okay, this is agood one.
Terry has a good question aboutfixing prohibited transactions.
Terry says if you take out, takeit out and realize it's
prohibited, can you repay itback?
So if you take money out and doa transaction, make an
investment, can you repay itback as like a you know,
whoopsie?
Or how do you return it back asa refund?

(41:37):
Or is it a second contribution,or what happens?

SPEAKER_01 (41:41):
Okay, let's say you had a transaction where you got
money from your IRA.
Okay.
And you're like, oh, damn it, Ijust watched this webinar.
Apparently that's prohibited.
Okay.
Um, this is attorney clientprivileged.
Okay.
I'm not going to use the realname here.
Um, first, what I would do isthis, you kind of want to talk
to a lawyer.
Do not call your IRA custodianon this.

(42:03):
Do not call if the directed IRAor whoever your IRA custodian is
and say, hey, I did this.
Is that prohibited?
Because if they say yes, they'regoing to distribute your
account.
All right.
So you need to go talk to alawyer and have attorney-client
privilege conversation aboutthis.
Maybe you trust your CPA, but bythe way, your CPA's information
is subject to audit, and the IRScould interrogate them or

(42:24):
request any of the records.
But if you talk to an attorney,it's attorney client privilege,
the IRS can't get any of thatinfo.
So have a professionalconversation with an attorney
about it.
Um, and uh and and what whatyou're gonna find in that
conversation is, and I'll justkind of outline this.
I've done, by the way, I didcontinue education, just I did a

(42:45):
um for lawyers and financialadvisors.
Um, I did a course on primitivetransactions and self-directed
retirement accounts that was forcontinue education credit.
I've been to other of thoseevents with lawyers.
It's a small niche industry ofpeople who play in this.
And the consensus of otherprofessionals, once an IRA is

(43:05):
engaged in a primitivetransaction, is you have a few
options.
One, report it as a primitivetransaction, just let your
custodian know, eh, I engaged ina primitive transaction, you're
gonna have to distribute myaccount.
Okay.
And that's gonna go on your taxreturn.
You're gonna put that on your1040.
Okay.
That that is one approach.
Okay.
That's frankly what the IRS isexpecting you to do.
The second approach might belike, hmm, I might have some

(43:29):
forgiveness here with the IRS.
I'm gonna fix it.
All right.
Now there's no officialprocedure on this for IRAs.
There actually is for 401ks insome instances, but you can take
an approach to try to fix thetransaction and put your account
back in the position it wouldhave been if you didn't engage
in a primitive transaction.
You're subject to audit, andfrankly, now it depends on who's
the IRS agent you get, and thenthe tax court judge you get

(43:51):
later if the IRS agent didn'tlike what you did.
So it's not saying there'syou've washed yourself clean of
it.
Your IRA custodian can't blessit or anything like that.
This is an attorney-clientprivilege conversation with your
lawyer to say, ah, I did that,but I fixed it.
I got my account back into thesame position it was.
Now, there's a lot of exceptionsto the prohibitive transaction

(44:11):
rules.
Um, that's the nice thing aboutthe tax code, is it giveth and
it taketh away, but here itgiveth right back with the
exceptions.
So, yes, we can do self-directedIRAs and invest in real estate,
but there are some prohibitivetransaction rules that you can
screw up, but there are alsosome exceptions to it.
So, no way we could get throughthis today.
I'm already trying not to makethis boring and have Lindsay

(44:33):
joke that I'm doing tax attorneymat today.
So we'll avoid the exceptions.
But as the geeky tax lawyer thatdid talk to clients for years
about this and actually didadvice, and my law firm still
does this at KQS lawyers, so sothere's a team still that can
help you, and there's other uhattorneys out there that are
smart on this too.
Um, but uh there are sometimesexceptions you can rely on.

(44:57):
So, but don't talk to your IRcustodian about it.
Best person is an attorneybecause that's attorney client
privileged.
And you may have ways where it'sactually not privated because
there's an exception, or thereis a way to get your account
back in the same position, andthen you're gonna have to worry
about what's my audit risk onthis.
All right.
Um, again, more of aprofessional conversation, not

(45:18):
really for me at directed I tosay, but it is helpful um to
know how are privativetransactions discovered or
alleged.
All right.
So here's how primitivetransactions are discovered or
alleged.
It's a common question I'll get.
This is actually isn'tinteresting, I I think.

SPEAKER_00 (45:36):
Just you.

SPEAKER_01 (45:37):
Yeah, just me.
I think it's is the the IRS doesnot have a department that
audits or is responsible forIRAs.

SPEAKER_00 (45:44):
Well, don't give them ideas.

SPEAKER_01 (45:46):
Yeah.
So like there's no IRAdepartment that audits IRAs.
There's actually a departmentfor employer plans, like 401ks,
that actually audits 401k plans.
Obviously, there's an individualdepartment that audits
individuals' returns.
There's a business departmentthat audits business returns,
and there's an estate departmentthat audits estate and trust tax

(46:06):
returns.
Okay, so there's differentdepartments that will audit
different things.
There's no department for IRAs,for better or worse.
So the way IRA privatedtransactions come about is your
IRAs invested in a company andthat company return got audited.
Okay, like I've read everyprimitive transaction case out
there.
The vast majority of primitivetransactions are come from a

(46:29):
business return got audited, andthe IRA was invested in that
business.
Peak and Fleck, perfect example.
They had a company, they had acorporate tax return actually.
It was actually a C corporationthat they did because it was an
operating business that couldhave had UBIT, but their IR Roth
IRA's own 50-50 of it, and that1120, the tax return that a
corporation files, got audited.
And then they started digginginto the business that they

(46:52):
bought and the all the nature ofthe transaction.
So that's how that one gotdiscovered.
The other one is your IRAcustodian sees that you
committed a prohibitedtransaction, whether that's us
or any other IRA custodian, oryou call them up and tell them
you did it, and then we willissue a 1099.
And I believe it's like codefive on the 1099.
I don't know.
There's like a code we have tocode it that says it was

(47:12):
prohibited.
But it basically your entireaccount gets distributed.
Okay, so that's the second wayit happens.
Um the third is um if your IRAum is uh is like on your 1040,
so there's like a number ofcases where um there's a guy
that owns some real estate inhis IRA LLC, and he was taking

(47:36):
all the expenses on schedule onhis on Schedule C, actually.
Um it might have been ScheduleE, but he was putting on his
personal return.
He was trying to write off theproperty on his personal return
and claim the income in his IRA.
He was just doing a dumb thing.
That's not what you do.
So he kind of like exposed whathe was doing to the IRS on his
personal return, and so theyaudited it.

(47:58):
401ks, um when you have a solo401k with more than 250k of
assets, you have to file a taxreturn for the solo 401k.
So we have thousands of clientsthat have solo 401k accounts
that they self-direct.
Your solo 401k return, this it'scalled a 5500 return, could get
audited.
So it's a low likelihood onsmaller 401ks, but it's

(48:19):
possible.
So that's the three areas whereyou'll typically see a primitive
transaction.
Um, and again, the most likelyis that there's some company
return or your IRA is involvedin a transaction and someone got
audited in that and they see anIRA and kind of dig deeper.
So all right, now let's talkabout the statute of limitations

(48:39):
here.
Um so there's an actual case onthis.
I'm just waiting for Lindsay tomake fun of me again.
All right.
I mean, if any of you want toread this, I think it's
fascinating.
Decent versus commissioner.
And I actually I was likeexcited when this case came out
because I'm like I I couldn'tfigure out what the statute of
limitations was, and I wasadvising clients for so long,

(49:01):
guessing I had the the guessright, but like now there's a
good case on it.
So the statute of limitations isbasically three years.
So but it's three years from thetime you filed your personal
return.
So for example, let's say likeright now we're in November of
2025.
Okay, so your 2024 return wasdue by now, right?

(49:24):
You had to file that even withextensions until um October
15th.
Okay, so it so with 24 is atplay to be audited, 23 is at
play to be audited, 2022 is atplay to be audited.
Okay, so those are the threeyears you would be subject to
audit right now.
What does that mean?
That means 22 is being audited.

(49:44):
The IRS is always auditing thelast year possible because
they're always behind.
So um, but 2021 and 2020,they're only auditable if
there's an exception met here,which I'll get into here in a
second.
But for the general purposes,even the IRS's internal revenue
agent manual for IRS agents saysto only audit up to three years

(50:07):
for prohibited transactions.
Okay.
Now, the IRS under statute cango up to six years to audit for
a primitive transaction, wherethey get an additional three for
a total of six.
Now, this they can only do thisif under if they allege a
primitive transaction and youradjusted gross income because of
the primitive transaction onyour 1040 on your personal

(50:29):
return would go up 25%, meaningit was significant enough, then
they let the IRS go back anadditional three years to a
total of six.
But this is only if theassistant secretary of the
treasury agrees and authorizes aadditional three years for a
total of six.
I have never heard of thathappening.
I've never seen a case wherethey went past three years.

(50:51):
I don't even know who thisassistant secretary on the
treasury is that authorizesthis.
And I don't know that thatperson knows either.
So, bottom line, worry aboutthree years.
Now, if you're committing taxfraud or doing something totally
fraudulent, um, there's anunlimited statute of
limitations, and that's the taxcode in general.
But what I really worry about,if you typically made a mistake

(51:12):
or something, um, is you'vereally got a three-year window
for statute limitations on aprohibited transaction.

unknown (51:19):
Okay.

SPEAKER_01 (51:20):
I thought that was interesting.

SPEAKER_00 (51:21):
That was fascinating.
I actually did not know that.
So in my 13 years, I never hadstatute of limitations.
I got schooled today, guys.
Um I think I think the wholeprohibited transaction area is
so fascinating, though, becauseyour average investor doesn't
realize that this is a thing.
So you guys already have a legup.
There's not a lot of people thatrealize that prohibited
transactions and disqualifiedparties take place when it comes
to dealing with your IRAs.

(51:43):
And that's because a lot ofpeople are used to your
traditional kind of IRA whereyou're buying Google or you're
buying a mutual fund.
You don't have to worry aboutthe owner of Google, right?
Being your father, hopefully.
Um so yeah, it's justfascinating.

SPEAKER_01 (51:55):
Actually, you're hoping it is your father.

SPEAKER_00 (51:56):
Yeah, you are hoping.
Yes.

SPEAKER_01 (51:58):
Then you wouldn't need an IRA if you're preparing
for retirement.

SPEAKER_00 (52:01):
Exactly.
Yeah.
Um we do have a lot morequestions coming through.
I've got a really good one inregards to IRA LLCs.
Uh, this one's from Gloria.
And Gloria asks, can youelaborate on the pros and cons
of using a checkbookself-directed IRA when investing
in tax liens and deedsspecifically?
But I think the pros and cons ofjust using it in general would

(52:23):
be awesome.

SPEAKER_01 (52:23):
Yeah, I love the IRA LLC.
Some people call it a checkbookIRA.
I actually use that myself forreal estate investments that I
do with my self-directedretirement account.
So um the most commonapplication is real estate
investors.
You're you're buying a property,it's a buy and hold rental, it's
a rehab that you're gonna holdor flip.
Um, or you're doing tax deeds ortax liens.

(52:46):
Um, the reason, the the primaryreason someone uses an IRA LLC
is it's just easier to do deals.
So whether I'm buying a propertythat's a rent that I'm gonna
rent or I'm in a rehab, if youjust think of the logistics of
it.
If my IRA owns the property,right, there's a lot of back and
forth with me and my IRAcustodian.
Hey, did you send the money?

(53:06):
Hey, did they you got to signthe contract?
Hey, you gotta pay this personthat went and worked on the
property.
It's kind of a pain in the buttfor you and us.
Um, but you can use this IRLCstructure instead, or rather
than from your IRA owning thereal estate or the tax lien or
deed here, I'll come back tothat in a second.
Your IRA owns an LLC, the LLChas a bank account, you're the
manager of it, and now you justtransact in the LLC's name.

(53:29):
So let's say you called the LLCABC Investments LLC, the
contract to purchase is in thename of ABC Investments LLC.
You don't need us to approveanything or sign anything or
send a wire.
You have a bank account in thename of the LLC.
You can authorize the wires asmanager of the LLC.
And so it puts you in a lot morecontrol to just manage the
investments.
If your IRE is just investinginto a private fund or a startup

(53:52):
and it's buying shares or unitsand something, you don't need
the IRLC because we're justgoing to process the paperwork.
Your IRE is going to gosubscribe and own the shares,
and then it's going to getdistributions or a payout at
some time in the future.
There's not a lot of maintenanceor things you got to do to make
the deal happen.
You're not dealing with a titleor escrow company.
It's pretty straightforward andsimple.
Now, on tax liens and tax deeds,what I've just seen over time is

(54:13):
that's a volume game, right?
And some of those may pan out,some of them may not.
Some of them might turn into aproperty you actually end up
acquiring, um, which some andsometimes is your end game goal
there.
Um, so because of all thatmaintenance and back and forth
and volume, um, you just want tohave an LLC.
That's what I would do.
If I was to, I haven't done taxliens, tax deeds.

(54:35):
Um, but this is where you can,if you're someone's like, what
the hell is he talking about?
You can go buy people's propertytax liens from the county.
If they don't pay their propertytaxes, you can go buy the lien
from the county.
And if they don't pay that backin a certain amount of time, you
can foreclose and take theproperty and wipe out mortgages
too, even.
And so there's some there'svarious state to state, and

(54:57):
there's even some nuances withinthe counties, within states, but
the general just is is you canown that lien right, which has
some interest, and that theyhave to the that the the ower of
the property will have to pay.
And also there's someforeclosure rights as well.
Now, there are some rights ofprior lien holders and mortgage
holders and stuff as well there,but um that's just a quick

(55:18):
summary there.
So if someone's doing that, I'vealways seen it as a volume play.
Endgame is you want to acquirethe property anyway, you'll be
far better off just having anLLC where you're managing all
those transactions.

SPEAKER_00 (55:29):
Especially when you're going to tax lien
auctions or anything like that.
When you're live at the auction,you want to be able to sign
contracts and write checks andhandle everything right then and
there.
Um if you don't have the IRA LLCin place, then you have to reach
out to us to do so.
Now we're super quick.
We can move really quickly.
Not every custodian can, though.
So be extra cautious, especiallywith timing on those things.
If you're at an auction, the LLCcould benefit you for that

(55:50):
purpose.

SPEAKER_01 (55:50):
Yeah, and a lot of them make you bring a cashier's
check, right?
And so, like getting a cashier'scheck out of your IRA from us,
it's it's not simple.
And I, if you're calling, ifyou're trying to do that, I'm
just gonna just do an IRA LLC.
You'll thank me later.
I know it's a little cost to getthat set up.
It's like$1,200 for an IRA LC.
Their IRE owns 100%, but yourtime and your life cycle of

(56:11):
making these investments, ifyou're trying to grow this
account over 10, 20 years, Idon't know your time period of
trying to grow this, you will,it'll be well worth it for you.
Um, and we want to work withyou.
Don't and we want to hear fromyou.
It's not about that.
Don't, don't feel, don't feelthat.
But um it's guys, I use it.
Okay.
I'm in the office.
I know everything.
I can tell people what to do.
I use the IRL C for my ownaccount.

SPEAKER_00 (56:33):
Yeah, IRA LCs are awesome.
So go to kcoslawyers.com if youwant to learn a little bit more.
Um, or when you book your phonecall with Michelle, she can also
go over a lot of the basics withyou um to tee it up to get you
set up properly for that.
Um, on that note, don't forgetto book a call with her.
I just checked her calendar andshe's completely booked for
today.
So sorry guys, if you're tryingto get in for today, she's fully
booked, um, but she does havesome availability tomorrow.

(56:54):
And then she's got even lessavailability on Thursday and
Friday.
So it looks like you're gettingfull, Michelle.
Sorry about that, but glad, gladyou're working uh the entire
week.
So thank you for doing that.

SPEAKER_01 (57:04):
This is her decision, okay?
This is not me.
Don't be like Matt's a terribleboss.

SPEAKER_00 (57:09):
No, no, we uh he absolutely allows us to have
days off, just not Michelle.
So no, I'm just gonna kidding.
Michelle's allowed days off too,but she volunteered.
So we appreciate you, Michelle.
Um, again, don't forget thatpromo code guys, BF250.
That's Black Friday 250, 250bucks off.
So add that to your notes whenyou book the call with her.
And there's a little spot youcan add some notes for your call
as well.
That'll make sure you get$250off.

SPEAKER_01 (57:31):
Awesome.
Okay.
Well, remember this is recorded,so you can come back to this.
You'll get a notification on itin the next day or two.
It'll be up at directedira.comslash webinar.
Make sure you're signed up forour newsletter.
If you're not getting ournewsletter, make sure you're
signed up for that.
You can do that atdirectira.com.
You'll get notices of all theother upcoming webinars that we
have.
You'll get reminders ofrecordings of webinars and all

(57:51):
the content we're putting outevery week.
Just trying to give you moreeducation so you can take
control of your retirement.
It's a pleasure to be your IRAcustodian.
For any of you that are clients,we do appreciate your business.
And for any of you that areprospects and thinking about,
you know, self-directing yourIRA and what's who's the right
IRA custodian, you finally foundthat.
You're here.
Just join the team already.

(58:11):
We we want to help you.
Um, and so now's a great time.
Take advantage of that promo.
Thanks, everybody.
Stay calm, self direct on.