Self Directed IRA for owner Financing?

Question

Has anybody used or are you able to use a self directed IRA to back a client that wants you to owner finance a house for them? What are the draw backs and/or how does this work?

Dmitriy Fomichenko · Answer

Jeff, this would not be allowed since you are personally benefiting from this transaction.

Gene Mitchell · Answer

if the IRA is providing just a loan for someone to purchase a property, is allowable. Just make sure that it does not provide a benefit to you. For instance if the person was purchasing a property from you and not just any property off the street, then it would be a prohibited transaction because you are benefiting from the IRA loaning the money to the buyer.

Gene Mitchell · Answer

you can make it work, but the LLC in your IRA has to be the one to purchase the house first. It cannot purchase a house from you. Be very careful that you don't do a prohibited transaction. Also, if your LLC owns a house for less than one year it will be considered a flip and you will have non passive income which will be taxed.

Jon Holdman · Answer

@Jeff Hink putting the LLC in the mix is irrelevant.  An LLC you control is still a "disqualified person" for purposes of IRA transactions.

Jeff Hink · Answer

This is a house we would have our LLC own thsn sell to the client.  The LLC would be separate from the SDI.  It sounds like pulling money from a 401K might be the way to go.

Jeff Hink · Answer

@Holdmand You read that right.  Thanks for the information.

@Dolgeh It sounds like like I can take money from a 401K and then loan that money out to the new home owner.

Thank you both.

Jon Holdman · Answer

Do you mean can your IRA (which is a completely separate legal entity from you) make a loan to someone so they can buy a house from you?  IMHO, no.  Why?  Because the IRA providing the loan to your buyer creates a benefit for you.   Specifically, it enables the buyer to buy the house.   While it may not strictly be a prohibited transaction (like your IRA making a loan to you would be), it violates the guideline that your IRA cannot engage in any transaction that creates a benefit for you.

Perhaps I misunderstand what you're proposing.

Account Closed · Answer

I am not sure I understand this but I will try. I and my husband buy houses with 401k money not IRA, usually for cash. Then we finance the house to a buyer. A usual term is 10% interest for 30 years.

The drawback is you need to make sure buyer can pay  back. Foreclosure is not good !

But I do not usually worry about this. If it happens, I get the house back in a better condition, usually.

The advantage I really like - I do not have to fix any houses! My buyers fix them.

Self Directed IRA for owner Financing?

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