Can I use my self directed IRA funds as a down payment for a mortgage or seller financed purchase?

Question

further more can I then purchase my IRAs position in the property at a later time with personal funds?

Doreen Chaisson · Answer

If you coinvest with yourself, you cannot get a non-recourse loan.  A NRL is only possible if the IRA is the sole investor (either directly or via an IRA-owned LLC) OR if it invests with other, non-disqualified parties.  Once you combine personal funds, leverage is out of the equation. This is cross-collateralization and is prohibited.

Dmitriy Fomichenko · Answer

@Luther M.

Loren is correct, your IRA can acquire investment property with financing, but the loan must be non-recourse. If you find the deal where seller is willing to carry the note - same applies, the note must be non-recourse, you can not provide personal guaranty when using IRA funds.

The loan mechanism Katharine mentioned only work if you have a 401k, it is not available with self-directed IRA.

Dmitriy Fomichenko · Answer

The rules are the same regardless which custodian you are using.  Custodians do not set the rules, IRS does.

Katharine Chartrand · Answer

You might be able to partner with your LLC to buy a house, but it may take the creation of a separate entity, like an LLC owned by your IRA.  IOW, the IRA is a member in an LLC and you partner with that LLC in the creation of a second LLC that owns the house. The IRA would have to be more than 50% owner of the LLC owning the house.

You would need to talk to the people advising you on your 401K trust.  If you don't have anyone, try mark nolan at mysolo401K.com. That would all be non-trivial to setup and manage and requires expert assistance.

You will run into problems getting a loan. I believe the loan would have to be non-recourse, since you can't borrow against any property owned by a retirement trust. But this may not be the case.  What is ambiguous is what rules apply to the trust itself and what rules apply to an entity or business the trust has invested in.

If you need a non-recourse loan, I've never observed a non-recourse loan in the wild, although people on this forum do suggest they exist.   It's not easy for an LLC to get a regular loan and it sounds like you need one. The first thing to do is to figure out whether financing is even available to  you for that scenario.

I push the solo 401K model pretty hard, but I will not be getting into deals with my 401K trust. You may be able to find an advisor who tells you that you can do it , but you introduce a compliance risk no matter who tells  you it is okay.  The IRS language prohibiting self-dealing in retirement trusts is very clear and, in my opinion, well supported by the logic of the program.

Retirement Trusts are a trust for SOMEONE ELSE .... the old person you will be 40 years from now who does not want to work. The government set these mechanisms up for the benefit of that person so they won't have to take care of you.  The self-dealing rules are intended to prohibit you from taking money away from that person.  When you invest in an LLC with your retirement trust, there are many ways you can intentionally and unintentionally cross the line.

The compliance issues around getting into deals with your 401K is ambiguous space at best. You would want to have very good counsel so you don't risk violating the rules of the 401K. For me it has not been worth it.

Luther M. · Answer

Thanks you Doreen and Katherine!

Luther M. · Answer

First off, I am kicking myself for not asking this question sooner on BiggerPockets :)

Thank you all  @Bob Krause  @Dmitriy Fomichenko

@Loren  Whitney Yes I am always available for learning :)

Katherine, in reference to "the IRA Trust can buy a house and own it.  but you can't borrow money against an asset owned by a retirement trust.  so if you need financing to do the deal, then the ira trust can't be the sole owner."

Does this mean I or my LLC could partner with my IRA to get financing?

Bob Krause · Answer

Check with your self directed, they all seem to have different rules.

They will tell you what you can and can not do.

Hope this helps.

Bob Krause

Katharine Chartrand · Answer

only if you use the loan mechanism... you can borrow up to 50% of the first 100K in your ira and use it for whatever you want.

otherwise, you can't self deal with IRA funds.  you know you are self dealing when the check from the IRA Trust is written out to you or your company or visa versa.

the IRA Trust can buy a house and own it.  but you can't borrow money against an asset owned by a retirement trust.  so if you need financing to do the deal, then the ira trust can't be the sole owner.

and you can't do business personally with your IRA trust.  you can't buy stuff it owns and it can't buy stuff you own.

>KNC<

Can I use my self directed IRA funds as a down payment for a mortgage or seller financed purchase?

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