Using IRA as a hard money lender

12 Replies

Hello BP!

I wonder if the following financing scheme is legal:

  • An investor has an self-directed IRA that is more than enough to cover acquisition and rehab of a house.
  • The IRA underwrites a 0% interest private mortgage ("hard money loan") that covers 75% ARV of the said house.
  • Once the rehab is complete the investor refinances (rate and term) the IRA loan with a conventional mortgage loan and the original money goes back to the IRA.

In essences the whole transaction looks like a regular hard money to conventional refinance. The difference is the source of hard money and zero interest rate.

If this is considered a prohibited transaction, what if they add an intermediary (e.g. a friend's LLC)? Then IRA loans money to the intermediary which in turn loans the same amount to the investor in form of a hard money loan?

Thanks

Nick

There are definitely others who are using their IRAs for hard money or private money lending. It can provide you with returns that get put back to your IRA and also help someone else's project get off the ground.

The point here is using own IRA to fund own deals without borrowing at 12% from hard money lenders. Also, having cash flow flowing back to one's pocket and not to IRA

If A borrows from B's IRA and B borrows from A's IRA, both at 0 interest and for a 100 years term then they effectively withdrew their money tax free. Correct?

If I am understanding this correctly, you want your IRA to purchase a property, and pay for the rehab for 0% interest. You cannot benefit form sweat equity from the property purchased by your IRA. I your IRA gets 0% return and you cannot make a profit, where is the deal. You can loan to others, but not yourself or your lineage.

This is easy, @Nick B. You cannot personally profit from a transaction with your IRA. It doesn't matter what the interest rate is.

When you start talking about what "the whole a transaction looks like," you know you are skirting the rules. Ditto, using an intermediary with the intent to deceive.  If you get caught, the IRS is not stupid.

If your IRA uses a custodian, they will prevent you from doing this. It's a larger problem if you are your own custodian because there's always a temptation to skirt the rules.

The IRA underwrites a 0% interest private mortgage ("hard money loan") that covers 75% ARV of the said house.

This would be a loan from the IRA to the owner of the IRA. That's a prohibited transaction. If you do it, the entire IRA account (not just the loan) is considered to be distributed and taxes and penalties will be due.

If A borrows from B's IRA and B borrows from A's IRA, both at 0 interest and for a 100 years term then they effectively withdrew their money tax free. Correct?

Almost certainly these would also be considered prohibited transactions.  I've heard of this being done by other posters here, but I think it wouldn't pass the "no benefit to yourself" test if the IRS catches you.

Your IRA CANNOT do ANYTHING that benefits you personally.

Originally posted by @Jeff Greenberg :

If I am understanding this correctly, you want your IRA to purchase a property, and pay for the rehab for 0% interest. You cannot benefit form sweat equity from the property purchased by your IRA. I your IRA gets 0% return and you cannot make a profit, where is the deal. You can loan to others, but not yourself or your lineage.

Not exactly. I want IRA to lend money to purchase a property, not to own it directly. Now, if this is not possible what about mutual loans as I stated above? Two non-related individuals loan to each other and never ask for repayment. If two is too suspicious, what about a crowd where each lends to a pool and borrows from the same pool on the same terms?

@Nick B. see my post above. I'll repeat: your IRA CANNOT engage in any transaction that in any way benefits you personally.

One attorney I worked with told me my IRA shouldn't even buy any property near where I already owned property as that could potentially be seen as benefiting me.

The litmus test that most accountants and attorneys used is CAN what you are doing stand up and pass an IRS audit in the future??

Now of course there are grey areas where the IRS interprets one way and the accountants and attorneys see it differently. When that happens it might have to go to court to resolve if a compromise can't be worked out.

If what you are trying is not even close to flying then usually the recommendation by accountants, attorneys  etc. will be not to even attempt.

No legal advice.

Ok, everyone. Thank you for your input. Let's close the IRA topic but I have another question.

Is it possible to self-loan (through an intermediary) to create a "hard money"-like transaction to refinance a property at 75% of ARV immediately after rehab? No IRA, just regular funds.

Originally posted by @Nick B. :

If this is considered a prohibited transaction, what if they add an intermediary (e.g. a friend's LLC)? Then IRA loans money to the intermediary which in turn loans the same amount to the investor in form of a hard money loan?

You are trying to use a "straw person" to do the transaction that would otherwise be prohibited. Indirect prohibited transaction is still prohibited transaction. 

Dmitriy Fomichenko, Broker
(949) 228-9393

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