Self-directed IRA Mortgage

[Juan Nieto]

I have been looking at mortgages for an investment property. I have not exhausted my options, but so far the market for these mortgages doesn't seem great. I have excellent credit, 800+ FICO. Best option I have heard so far was 5%, 20% down and 2 points. I will keep looking for other options, but as I started thinking, I recalled using a self-directed IRA to buy real estate. I have a pretty healthy IRA balance. I don't want to buy the real estate through my IRA, since my goal is to start building a portfolio to offset my current income and eventually do this full time. I was wondering, could I use a self-directed IRA to create a mortgage to myself to buy this property? Essentially, the IRA is investing in mortgages. I know there are certain arms length type restrictions. I figure I could charge myself a prime rate mortgage of between 3.635- 4%, pending prevailing market conditions. Even if I had to charge myself more, to satisfy any IRS requirements, I am okay with that since I would be paying the interest to myself. Would this hold water? Would I still be able to deduct mortgage interest since the IRA account is a separate entity from myself? I realize the big downside is if the market has a nice positive set of years, I would miss out on that in my IRA, but at the same time I am limiting my downside by essentially guaranteeing a 4% return. Also, this would only be a portion of my IRA, the rest would be invested in mutual funds.