Self directed llc down payment

[Mark Burlison]

Have a down payment for my first property in a 401k. My accountant mentioned self directed ira llc's. He really didn't know much...but had heard of them. Trying to sort through the info...I am over 59 1/2. Asked a company today that sets these up and they said I could use one for my down payment, then finance my purchase. So how would that work with my down payment ONLY coming from a self directed IRA LLC. Am I still restricted by all the rules of a self directed IRA????? Some even question the legality of this maneuver with the IRS. Thanks for any input.

[Brian Eastman]

@Mark Burlison

If you setup a self-directed IRA and then use those IRA funds for down payment on a property, then it is the IRA, not you, that is purchasing that property. The transaction would be subject to all appropriate IRS rules, meaning keeping things entirely at arm's length and separate from yourself and close family.

The IRA would make the down payment and need to obtain a non-recourse loan - meaning no personal guarantee from you. The lenders that offer such loans typically want 30-40% down and 10-15% cash on hand in the IRA as reserves.

The IRA pays all expenses associated with the property such as the mortgage, property taxes, insurance, repairs, etc.

The IRA receives all income produced by the property after paying expenses.

The percentage of the income that the IRA receives as a result of using the non-IRA (borrowed) money is taxable to the IRA as Unrelated Debt-Financed Income (UDFI). This tax typically does not add up to much, but is something you would want to fully understand before engaging in such a transaction.

So, if the IRA can manage the above and expect better return on investment that what it is invested in today, it makes sense.

If you were thinking the IRA is a source of funds available for you to acquire an investment property - which it kind of sounds like - then you need to head back to the drawing board.

The fact that you are over age 59 1/2 only means that you have the ability to take taxable distributions from the IRA without penalty. What happens inside the IRA is still tax-sheltered and therefore subject to the same rules as before age 59 1/2.