Need guidance on using a self directed IRA for RE down payments

Buying & Selling Real Estate
4yFollow

Need guidance on using a self directed IRA for RE down payments

Wayne Connell
Rental Property Investor · Hershey, NE · Member since 2018 · 13 posts · 0 votes

My wife and I have a retirement account we rolled over into a self directed IRA to use for down payments on two projects. One is a purchase of a small storage unit facility and the other is building a four plex. We would use about 15% of the purchase price from the IRA to purchase the storage units and the remainder of the purchase is going to be owner financed. On the build we will use about 30 to 35 percent of the build cost from the IRA and the remainder will be bank financed. Both will be non-recourse loans. While I am familiar with the pros and cons of using a self directed IRA and how they basically work, as well as some of the unique requirements when utilizing one, I am far from educated about the finer points.

The main issue I am having is I have the storage units under contract and I am trying to make a request for funds. However, the company I have the self directed IRA with says they cannot give me financial advice and I have checked with my attorney, financial advisor, and my CPA and none are very familiar with the self directed IRA. My CPA is willing to try to help getting it set up but is researching the procedures. Does anyone have any advice or guidance about how or what I need to do to ensure this is structured properly or can put me in touch with someone who can educate me. Thanks in advance!

0Reply
39 views

Most Popular Reply

Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
4y
Originally posted by @Mike Kirby:

@Wayne Connell I think it would be a prohibited transaction to use 15% down payment from your SDIRA and then owner finance the rest. You can’t mix the two like that. Your SDIRA can get a non-recourse loan but most non-recourse loan providers will require more than 15% down payment. There are a couple of SDIRA companies promoting themselves on this forum. You need to talk to the one that seems like he knows what he’s talking about. It won’t take you much research to see who that guy is.

Mike, I think Wayne is referring to "seller financing", which is totally acceptable and would not be considered a prohibited transaction (Wayne please correct me if I'm wrong). You don't have to use bank or a mortgage company to finance investment deal in an IRA, any private lender, including a seller, can be the lender. And as long as the note is structured to be "non-recourse" - the IRA is in compliance.

1Reply
See this reply in the discussion

8 Replies

Jump to latestLatest
  • Taylor L.
    Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
    4y

    There are a ton of potential pitfalls. No transactions can go through you - so when you need to hire a handyman to clean up, your IRA has to hire them and pay them. You can't, because you can't financially deal with your IRA. There are many other examples of mistakes people make in this way.

    Every time your trust company does a transaction for you, they're going to charge a fee. That's why many investors have turned to the Checkbook Control IRA. However there is some reasonable speculation that checkbook control IRAs will come under severe scrutiny of the IRS in the coming years.

    0Reply
  • Mike Kirby
    Rental Property Investor · New Braunfels, TX · Member since 2021 · 288 posts · 255 votes
    4y

    @Wayne Connell I think it would be a prohibited transaction to use 15% down payment from your SDIRA and then owner finance the rest. You can’t mix the two like that. Your SDIRA can get a non-recourse loan but most non-recourse loan providers will require more than 15% down payment. There are a couple of SDIRA companies promoting themselves on this forum. You need to talk to the one that seems like he knows what he’s talking about. It won’t take you much research to see who that guy is.

    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    4y
    Originally posted by @Mike Kirby:

    @Wayne Connell I think it would be a prohibited transaction to use 15% down payment from your SDIRA and then owner finance the rest. You can’t mix the two like that. Your SDIRA can get a non-recourse loan but most non-recourse loan providers will require more than 15% down payment. There are a couple of SDIRA companies promoting themselves on this forum. You need to talk to the one that seems like he knows what he’s talking about. It won’t take you much research to see who that guy is.

    Mike, I think Wayne is referring to "seller financing", which is totally acceptable and would not be considered a prohibited transaction (Wayne please correct me if I'm wrong). You don't have to use bank or a mortgage company to finance investment deal in an IRA, any private lender, including a seller, can be the lender. And as long as the note is structured to be "non-recourse" - the IRA is in compliance.

    1Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    4y

    @Wayne Connell,

    I think you would be best served if you discussed your issues/questions with the professional over the phone. Some of the statements you made a unclear... It is not possible to have a joint IRA with your wife, either you have one, she has one, or each one of you have separate IRAs, but there is no such thing as a joint IRA. Is the IRA you are referring to with custodian who allows alternative investments? What do you mean "trying to make a request for funds"? Advancing funds for investments is a responsibility of the custodian, and it is not a financial advice... I personally can't comment or answer your questions until I clearly understand your situation.

    1Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    4y

    @Wayne Connell, another question is owning self-storage units... who is going to manage and maintain them? As a "disqualified person" you are not allowed to provide any services or perform any work on the property. Everything must be "arms length". And did you consult with the tax expert on how this income will be classified? Only passive income in an IRA is sheltered from taxes, income from an active trade or business will be subject to Unrelated Business Income Tax, your IRA will be responsible for paying this tax.

    0Reply
  • Wayne Connell
    OP
    Rental Property Investor · Hershey, NE · Member since 2018 · 13 posts · 0 votes
    4y
    Originally posted by @Taylor L.:

    There are a ton of potential pitfalls. No transactions can go through you - so when you need to hire a handyman to clean up, your IRA has to hire them and pay them. You can't, because you can't financially deal with your IRA. There are many other examples of mistakes people make in this way.

    Every time your trust company does a transaction for you, they're going to charge a fee. That's why many investors have turned to the Checkbook Control IRA. However there is some reasonable speculation that checkbook control IRAs will come under severe scrutiny of the IRS in the coming years.

    0Reply
  • Wayne Connell
    OP
    Rental Property Investor · Hershey, NE · Member since 2018 · 13 posts · 0 votes
    4y

    Taylor,

    Thank you for the reply. Yes there are some challenges using a self directed IRA but as far as managing the property we have it all worked out where I will not be involved. The company I use charges a fee based upon the dollar amount of the IRA not each transaction so I pay the same fee each year, which makes it easier to plan. I am a little confused about the finer points but am slowly working through them. Thank you for taking the time to reply. Wayne

    0Reply
  • Wayne Connell
    OP
    Rental Property Investor · Hershey, NE · Member since 2018 · 13 posts · 0 votes
    4y

    Dimitriy,

    Yes you are correct, the owner is financing the property and I need the money for the down payment, the remainder is going to be structured as a non-recourse loan from the seller. Regarding your other questions, I have the property set up with a qualified person to run it. The only maintenance will be some snow removal and possibly some mowing, (literally about five minutes worth) which. I am aware that I cannot literally "change a light bulb" on the property (example I was given by the IRA custodian). My issue is completing the form to get funds for the down payment. My down payment is approximately 12% of total loan. One of the consultants for the IRA custodian said that I can then only get 12% of the money needed for the down payment. Another said I can get the entire amount, hence my confusion. The second person I talked to, when I asked them how I needed to request funds to ensure that we got the full amount of the down payment stated that they could not give me financial advice, just advice on how to complete a form?? Also, this company does allow alternative investments such as real estate.

    I am currently trying to locate someone locally who can help me navigate through the process. I understand much about how the basics work I just need someone to teach me the finer points. I am consulting with a CPA on ensuring it is set up correctly for taxes and you are correct, the IRA is actually in my wife's name only. Furthermore, we are trying to figure out how to set up the remainder of the note, is it in our name or in the name of the IRA? Can we hold it in a LLC that we hold our other property in or does it have to be on its own? As I said in my original post we are looking to use the funds to fund another project later in the spring so I am trying not to make too many mistakes and cost myself thousands of dollars in penalties and taxes. Thank you for replying. Wayne

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free