The investment opportunity of a lifetime – but no cash on hand?

What can you do when a brilliant investment opportunity presents itself, but neither cash nor financing are available?  Our firm recently helped a client find a creative solution to this dilemma.

Our clients, successful businessmen from Kankakee County, learned that a unique and highly sought after family farm was coming onto the market. Bank financing was not an option, and the clients lacked liquid funds to complete the purchase.  The clients, however, did have sufficient pension funds in IRAs to make a substantial down payment. Working with us, we identified an approach both buyer and seller embraced. Using an investment structure approved by the U.S. Tax Court in Swanson v. Commissioner, 106 T.C. 76 (1996), the clients were able to roll over their existing IRAs into new self-directed retirement accounts.  The new self-directed IRA trustee was authorized to use the IRA funds to purchase member interests in a new LLC, which we set up to purchase and operate the farm.  An installment contract was negotiated between the LLC and the seller, and the newly funded LLC made the initial payment.  An independent farming operation leased the farmland through the LLC, with farm rent being paid to the LLC. Funding for the future contract payments will come from the farm income and investors who will be offered additional member LLC interests.

Our happy clients are now the proud owners of the farm, and the seller was able to sell an illiquid asset over a period of years, while deferring a large capital gain. All revenue from the newly acquired farm will accrue through the LLC into the clients’ self-directed IRAs, and because the investment assets never leave a tax-advantaged retirement account, the clients will also be deferring income tax on the accumulating farm earnings.  The approach is one accepted by the IRS in Field Service Advice Memorandum 200128011, so the audit risk is very low.  The clients have made their new investment, and we were able to make the transaction work for them.  Dilemma: solved.

Disclaimer: This article is provided for general informational purposes only and is not legal advice.  Past results are no guarantee of future results, and the information and materials provided may not apply to any specific factual and/or legal set of circumstances.