Westbury, NY · Member since 2016 · 69 posts · 37 votes
Hey all,
Just got a foreclosure property offer accepted. My numbers check out for a BRRR but I do have some questions on my downpayment for the Hard Money Loan (HML). I have a partner whose self directed IRA we want to use towards the HML downpayment just not sure how to go about that. Would I be able to apply for the HML under my name and then just use his self directed IRA? How does that need to be structured?
I know there are several restrictions around the self directed IRA so that definitely comes first. Any thoughts and guidance would be much appreciated!
Specialist · Delran, NJ · Member since 2016 · 2k+ posts · 951 votes
6y
I'd have to think it through more throughly and you can maybe ask some of our experts like @Dmitriy Fomichenko but i think he can just write you a loan from his SDIRA (and you guys can come up with terms) and then use that for the down payment. Most hard money lenders I know don't care about sourcing your funds for the down payment.
@Taylor L. I'm curious if you could expound on your comment. To the best of my knowledge the only disqualified persons are your descendants and ascendants (i.e. people who you could inherit from or who could inherit from you). It may be possible that what they meant is that he couldn't loan from his SDIRA to an entity owned by both of you, but I don't think there's any reason he couldn't loan directly to you.
Investor · Omaha, NE · Member since 2011 · 475 posts · 211 votes
6y
I am not a lawyer but I have had a SDIRA since 2006 I have used for real estate purchases and any loan has to be nonrecourse, which I doubt this is with a HML involved.
Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
6y
I've talked with some experts who have told me that business partners are disqualified persons, meaning that if you're a partner with someone already, you can't benefit from their SDIRA.
You are describing a fairly complex situation with a lot of unknown variables. The internet will not provide the answers you seek. Your partner should start with his IRA custodian for basic guidance, but they will be limited to some basic transactional overview. A licensed attorney or CPA would be necessary to get real answers.
Some concerns:
The lender may not issue a loan to you if your skin in the game is coming from another party.
The hard money loan would need to be non-recourse if the IRA is involved.
The IRA may have exposure to tax on unrelated debt-financed income.
The presence of the IRA in the deal could complicate the post-rehab refinance, which would need to be non-recourse if the IRA is still in the deal. Alternately you could structure the deal so the IRA exits when refinancing happens.
... probably more. Again, paid, licensed advice is required for what you are looking to accomplish.
Specialist · Delran, NJ · Member since 2016 · 2k+ posts · 951 votes
6y
I'd have to think it through more throughly and you can maybe ask some of our experts like @Dmitriy Fomichenko but i think he can just write you a loan from his SDIRA (and you guys can come up with terms) and then use that for the down payment. Most hard money lenders I know don't care about sourcing your funds for the down payment.
@Taylor L. I'm curious if you could expound on your comment. To the best of my knowledge the only disqualified persons are your descendants and ascendants (i.e. people who you could inherit from or who could inherit from you). It may be possible that what they meant is that he couldn't loan from his SDIRA to an entity owned by both of you, but I don't think there's any reason he couldn't loan directly to you.
The list of disqualified persons to an IRA extends beyond just yourself, your spouse, and lineal family. Fiduciaries to your account and certain business entanglements are also viewed as disqualified.
IRC Section 4975 (E)(2)(I) lists:
"a 10 percent or more (in capital or profits) partner or joint venturer of a person described in subparagraph (C), (D), (E), or (G)."
So, if you and another person have existing personal partnership or joint venture enterprises, having your IRA transact with that person could be questionable.
Westbury, NY · Member since 2016 · 69 posts · 37 votes
6y
I believe I know the answer but better to ask, could the business partner get the HML loan and the downpayment funded by the self directed IRA? I believe there is some sort of arm's length rule, preventing this, if I recall correctly.