Investing in RE with IRA funds

[Jennifer F.]

Hello~
We have a dilemma and would appreciate anyone's input. We are both in our early 40's..no retirement at our place of employment where we both have been for over 20 years. Our jobs are very secure and we plan on working for probably about 25 more years. We built our own home about 6 years ago and have 24 years left on the mortgage. We have been investing in our own IRA's for about 6 years and have approx. $30K saved up that is in long term CD's. We have the opportunity to purchase a home that is for sale in our neighborhood..before the housing bust this house was valued at over 300K..only built 5 years ago. We can now purchase it for in the $80,000.00 range. The rental value would be approx. $1,200.00 per month. We have been pre-approved for an investment loan through our bank..but need 20% down. Would this be a wise investment to use our IRA funds for a down payment? We do not have the cash to do it otherwise. We would love to get into investing..just not sure if this is the correct way to go about it. I have been looking at owner carries..but there don't seem to be much in our area. Would we be really killed in taxes at the end of the year? Any advice would be GREATLY appreciated!

[Jon Holdman]

You cannot do what you are asking to do.

You could convert your IRA to a self directed IRA with one of the companies mentioned above or one of many others. However, you need for the IRA to get the loan. There are only a few lenders that do those loans and 35% down would be about the minimum. All money spent on the house must come from the IRA and any income goes back into the IRA. So, you absolutely have enough cash left in the IRA to fund a major repair. I would want to have at least $10,000 in cash in the IRA after the purchase. Otherwise, a major problem, such as a roof replacement, becomes impossible to fix. You cannot use any of your own money on the property - that would be a contribution. You cannot use any of your own labor, that's also a contribution. You can't take any money out, that's a distribution.

You can't use the IRA money in any way to get a personal loan. That's a prohibited transaction and will result in your entire IRA being immediately and irrevocably distributed and taxes and penalties will be due immediately.

If you do get a 65% LTV loan for the IRA, 65% of any net rental income is subject to UBIT - unrelated business income tax. This is a wicked tax intended to level the playing field between taxable entities and non-taxed entities. But it means your IRA will have to pay tax on the debt-financed portion of the rental income and then you will pay tax when you take the money out of the IRA.

I was cautioned by my attorney not to purchase any properties in my neighborhood or any area where I owned properties with my IRA. That's because that could be considered to be a benefit by improving the values in an area where you already own. Any transaction that in any way benefits you or any other disqualified property w.r.t. your IRA is a prohibited transaction.