BiggerPockets

I'm trying to figure out how to ask this--I feel like I have 3 pieces of a 500 piece puzzle.

What I have:

-Self Directed Traditional IRA which has sufficient funds for a down payment for a property, but not for an outright purchase.

What I want:

A non-recourse mortgage using SDIRA money for a down payment.

I'm not sure I can even do this--I went to the State Foreclosure Laws page and looked at Wisconsin, but don't really know what I'm reading. I didn't see the word 'recourse'.

I guess what I'd like to hear from anyone reading this is what would be the best course of action for investing this SDIRA given the above circumstances.

Yes, its entirely possible. The number of lenders who do this is very small, though. You're probably looking at 30-35% down payment. I'm aware of one lender in our area who does this, but they're just local.

Be aware of UBIT and UDFI - unrelated business income tax and unrelated business debt financed income. If you have, say, 2/3's of the price you pay financed, then two thirds of the income, after deducting depreciation and all expenses, is subject to UBIT. Then, you will pay tax again when you take the property out of the IRA.

Aaron, I have not used them before, but there is a national lender that specializes in doing loans to SDIRAs.

Just google "IRA Lending" and they should come up.

Like Jon said, you will probably have to put 35% down. They also will look at the income/rent coming in and will want the income to cover the PITI + 20%, typically.

It can be a great way to leverage your SDIRA. Something else you may want to consider is partnering with another SDIRA or even another party, does not have to be an SDIRA. The only key factor on partnering is that for all expenses (and income) it has to be proportionately allocated. If you personally put in half, and your SDIRA puts in half, and you have a $1000 maintenance bill, you personally have to pay $500 and your SDIRA has to put in $500.

I would make sure you consult with your SDIRA Custodian, they can make sure you keep things straight, taxwise.

Brian

If the purpose of a retirement plan is to accumulate wealth tax free until retirement, then owning leveraged real estate in one can be self-defeating due to the taxes involved.

In my view, you'll likely get greater total returns if your plan invests in real estate paper such as discounted notes, loans, tax liens, and performing 1st trust deeds. There's no leverage, but the gains can be great and with no immediate tax consequences.

Additional benefits are that these can be purchased in small investments, which reduces risk, and the liabilities are comparatively low.

Jeff

consider the value of rolling the account over to a ROTH IRA. You will pay tax on it, grow it tax free and withdraw it tax free.

This does not apply to every home purchased with Non-Recourse money correct? Does it not only apply when the borrower owns the property in an LLC? I am a little fuzzy on the details, but I do know that not every non-recourse loan is subject to those taxes. Do you have any insight?

I'm not aware of ANY exceptions to the UDFI rules. Other than a Roth IRA, which isn't subject to this or any UBIT taxes. The IRS publication that goes through these taxes, Pub 598, specifically excludes Rents from UBIT. See top of third column of page 9. Then, the IRS taxes back this exclusion in column 3, page 14. It applies only to "acquisition indebtedness" and there are some exceptions. But I don't see how you or I would use debt to finance a property in an IRA and then claim either that its not acquisition indebtedness or that one of the exceptions applies. Non-recourse (mandated by IRA rules, you can't guarantee a loan to your IRA) and LLC doesn't matter.

I was researching UBIT, UBTI and UDFI a few weeks ago. American Pension Services, an SDIRA/solo 401k custodian, has a newsletter from 2009 that covers this well. I do not work for or use American Pension Services so this is in no way meant to be a plug for them. If you go to their website you can download the newsletter from 2nd quarter 2009. I also don't know if legislation has changed anything mentioned in the newsletter since the article was written. Assuming admin is OK with it, here is the direct link: https://americanpension.com/uploads/Second%20Quarter%2009%20Newsletter.pdf

Hello,

I am looking to clarify what I am reading here and otherwise.

Can my own SDIRA 'partner' with myself?

What I mean is this; Could I use my SDIRA to put in say 30% of a purchase price, and then OUTSIDE of my IRA, use financing to come up with the other 70%? So it would be a 'partnership' between myself, and my own SDIRA.

I realize that all inputs and out-goes would need to be at that same percentages as the original structure.

My reason for wondering about this is for the possibility of working with a local lender that I have a history with, instead of using a big national type of outfit that usually does the non-recourse loans.

Maybe I'm way off base, but just wondering.

Thanks, Dan

Chris- i think Dan's scenario would be a prohibted transaction.

@Daniel Dietz, I agree with Dawn. My understanding of the IRS and SDIRAs is that this would be a prohibited transaction b/c it is providing benefit to you directly TODAY. You cannot use your SDIRA for anything that provides you or your immediate family benefit currently. (So you can't invest it in a brother's business, or your own business, etc)

Please look into that further before you do that! Here's a link to get you started.
http://www.theentrustgroup.com/investment_options/investment_prohibited_transactions/