Real Estate Transaction

[No Name]

I know this has been discussed before, but here goes.

Client thinks he's got an opportunity to buy some real estate on the cheap. Wants to buy it with plan money. Dad is Trustee and Son a participant. Wants to know if Plan can buy half and Son can buy half. Purchase would be from an unrelated third party.

Next comes the fun stuff. Dad has close to $2mm. If all goes well, he flips the property in a few years. Down the road, he's turned what could be a capital gain if bought outside the Plan, to ordinary income when RMDs begin. RMDs should put him in a pretty high bracket.

Son, buying outside the Plan, would be taxed at capital gains rate.

[Alf]

Need to know what they are going to do with the land, how much the son will own, and who they are going to eventually sell to. If the plan buys first (not prearranged deal) and they don't use the land the acquisition is almost certainly not a PT.

[QDROphile]

I disagree. Suppose son wants to buy the property, but can't cover the entire cost. Daddy Trustee steps in to cover half, thus enabling the transaction (or at least half of it) that otherwise would not have occurred. Plan assets have been used for the personal benefit (outside the plan) of a disqualified person. At best, one may have a facts and circumstances argument in defense.

[Alf]

Sure. My comment that it not be part of a prearranged deal was intended to pick up the general PT prohibitions.

Real Estate is so hot right now that everybody is doing this and I have got to believe that taxpayers that follow the letter of the law (including the general or indirect PT rules) are going to be ok.

[No Name]

The purchase would be from a total stranger. Son would own half interest. How, I don't know. Plan buys property, Son buys half interest from Plan? (He's currently a participant).

There is a building on the propery. The intent is to collect rental income while holding it, and selling it to an unrelated party in the future. Neither the Dad nor Son would be using the property. It's in a different state.

[QDROphile]

Purchase of interest in the property from the plan is a transaction between the plan and a disqualified person. What is the exemption?

Even if the son and the plan each bought a 1/2 interest from an unrelated seller, co-investments are dangerous. There is always a way to look at the transaction as a use of plan assets for the benefit of a disqualified person. Why didn't one or the other buy the the entire interest? How was the split decided? Who is getting some part of the deal that was otherwise out of reach? Who gave up something that was otherwise available? Some answer will suggest improper use of plan assets.

[JAY21]

QDROphile's comments are valid but I think it would be a bit of a stretch for the IRS to prove the "enabling" theory you've got going. We've had audits with co-investments before like this and although they got a close look they never had the "enabling" theory thrown at them. To me it would seem a bit of stretch for the IRS to prove that ONLY the plan's trustee could have been used as a co-investor to enable this transaction to occur which also benefited the participant/son and therefore it's entirely for personal benefits.