owner financing in a self-directed IRA

[Rising Tide]

I've always used my self-directed IRA to buy, flip and hold individual lots and never considered financing due to the non-recourse lender hurdles.

I'm interested in some raw land and the owner is willing to owner finance for 20% down. My question is this, if I have my IRA buy it do I need to do anything other than make certain I have enough in the IRA account to pay each month's payment?

[Jon Holdman]

A couple of items to consider.

1) The loan must be non-recourse. You cannot personally be involved in the loan. You can't guarantee the loan. Sounds like you know that, but the seller probably doesn't, and may try to put you on the hook.

2) A fairly painful tax will come into play when you finally cash out the property. If you still have the financing in place when you sell it, you will be subject to UBIT - Unrelated Business Income Tax. You have to figure out the fraction of the property that was debt financed at the point where you sell it. That's determined by the amount of the debt divided by the basis. Once you determine this debt financed fraction, then multiple that by the profits, and the result is subject to UBIT. This tax is computed at corporate rates (or some such), and the brackets are much smaller than personal taxes. Once you're above about $10K taxable income, the tax rate is something like 35%. Your IRA, and not you, will have to pay this tax. If you pay the debt off 12 months before you sell, you no longer have to pay this tax.

Jon