Self Directed IRA doing a mortgage note for a SFR purchase

26 Replies

I am buying a SFR as an investment property. It is out of state and will not be used in any way personally.

I have a Self Directed IRA and would like to start trying out Mortgage notes.

Is it OK or prohibited to do a first and only mortgage on this property with my Self directed IRA?

So far one Trust Company says no and one says yes.  Help! experience?

Cheers,

Buddy

Buddy,

the IRS rules are pretty clear: you are considered to be a "disqualified person" to your IRA and any transaction between the two is prohibited:

https://www.irs.gov/retirement-plans/plan-particip...

It is very important for you to understand the rules yourself, there are some online promoters who will tell you "yes" for everything just to get your business or our of ignorance, but ultimately you are the one responsible for every transaction in your IRA. Using your IRA to lend to yourself will be considered prohibited transaction by the IRS and will disqualify your IRA resulting in sever penalties.

Dmitriy Fomichenko, Broker

Thanks @Dmitriy Fomichenko , quite a quick reply!

That sound correct to me, but since one answer was yes I wanted to check.

In doing this I could agree to a high interest rate and points to essentially fund my IRA through the mortgage.

Cheers,

Buddy

Buddy, I am wondering who told you yes? Was it your custodian, did you ask someone this question specifically or just found something online? Please share with BiggerPockets community so others can stay away from this source... There is so much misinformation out there! 

The terms of the transaction are irrelevant, it is your personal involvement with the IRA that makes is prohibited. 

Dmitriy Fomichenko, Broker

@Dmitriy Fomichenko , It was a Florida SDIRA Trust Company sales rep.

I specificaly set up a 100K SFR purchase with 50K from a 1031 QI and 50K from my SDIRA with their Trust account.

I currently am paying such a mortgage FBO one of their customers.  He did say to fill out one of their forms and submit for approval, so I would think it would not go through.   Most likely just lack of personal knowledge.

Originally posted by @Dmitriy Fomichenko :

The ignorance of those who should know the subject is not uncommon... again, proves the importance of knowing the rules yourself. 

 YES...and not always relying on BP posters for good info. ALWAYS consult a professional.

John Thedford, Real Estate Agent in FL (#BK3098153)

Maybe he did not realize the part about the 1031...  Yes, you can't mix them, big no-no with the IRS.  I write paper and do equity participation with my SDIRA and you can PM me with any questions you have.  Citadel, Class of 1990....

Tom Burns, Real Estate Agent

    Originally posted by @Tom Burns :

    Maybe he did not realize the part about the 1031...  Yes, you can't mix them, big no-no with the IRS.  I write paper and do equity participation with my SDIRA and you can PM me with any questions you have.  Citadel, Class of 1990....

     How?
    @Dmitriy Fomichenko

    John Thedford, Real Estate Agent in FL (#BK3098153)

    Originally posted by @Tom Burns :

    I write paper and do equity participation with my SDIRA and you can PM me with any questions you have.

    Tom, you are considered to be a "disqualified person" to your IRA. IRS rules prohibit such person from engaging in any transaction with the IRA, receiving any direct or indirect benefit personally from the IRA or providing any services to the IRA. Your equity participation deal might very well be "prohibited transaction"... there are many people out there violating the rules because they read some comment online from some "guru" saying the can and as a result placing their entire IRA in jeopardy.

    Dmitriy Fomichenko, Broker

    OH man, once again @Dmitriy Fomichenko is stirring us all up.  I think he knows what he's talking about and is very knowledgeable and wants to protect us all from ourselves.....  Thanx D, on the other hand, maybe we can suggest how @Buddy Holmes deal CAN be done instead of simply telling him it can't be done.  For me, I had to really get creative with investing in order for any chance of financial success.  The conventional road simply didn't work in my favor.  Maybe one of our experts could give Buddy some assistance because where I stand, I'm not sure if all of his options have been exhausted, but none of us know his whole story.  

    Why can't buddy simply buy the house outright with his SDRIRA?? Seems like that may be the best option.... Then his IRA owns it and the rents can come directly into the IRA. OR, buy it, then owner finance it creating a note payable to your IRA, maybe I'm missing something here....

    @Kris Haskins ,

    If the water is clear, it doesn't matter how much you shake the bottle, it will remain clear. However, if you shake seemingly clear bottle with some mud on the bottom - the result will be muddy water. 

    Yes, I'm trying to expose the mud on the bottom so that the readers can be aware of it and hopefully spare them from making very costly mistake.

    I love your positive outlook at things Kris! Of course there are legitimate ways to get the deal done! It seems that your proposals should work... Buddy just have to make sure that the transaction of his IRA is truly 'arms length'.

    Dmitriy Fomichenko, Broker

    Thanks for all the ideas. To give more details I am going to pay cash for this SFR in a 1031 exchange process. I don;t have sufficient unused cash in my SDIRA currently to buy the SFR. I can, if legal, do a refi with the cash in my SDIRA. I would set the interest rate but proceeds would go directly back to the IRA trustee. Is this arms length?

    @Buddy Holmes Dmitriy is absolutely correct.  However, what you can do if you want to purchase a property is use a nonrecourse lender to purchase a property, or if you have a Solo 401k you can take a loan within certain parameters.  @Dmitriy Fomichenko actually blogged this post a year ago that is pretty helpful.  In the future, instead of asking can I, try asking how can I?

    https://www.biggerpockets.com/blogs/2810/50272-list-of-non-recourse-lenders-for-self-directged-ira-and-401k

    Gang, I am a bit confused... I posted above that he could not do it, it is prohibited, but a couple posters kind of slammed me.  Not sure why?  I just reiterated what another poster had said (you can't mix them).

    Tom Burns, Real Estate Agent

      Also, how is equity participation a prohibited transaction?  If a flipper comes to me and says they will give me 25% of the profit if I fund 50% of the deal, and my SDIRA does the funding and all the proceeds go back in the SDIRA, how is that prohibited???

      Tom Burns, Real Estate Agent

        @Tom Burns ,

        If there is a possibility that there is an issue with your transaction - would you just ignore it or would you want to know about it? Don't be so sensitive, but I'm glad you ask questions, this is the right thing to do. Let me clarify...

        In your original comment it sounded that YOU (personally) do equity participation with YOUR IRA. Hence was my comment - you can't partner with your IRA. Now it seems that this is not the case, you are personally not involved in the deal, it is a third party flipper and your SDIRA, is that correct?

        Dmitriy Fomichenko, Broker

        What rule says you can't can't co-invest in an equity deal with your IRA?

        Actually the rules do allow for co-investing with your IRA or solo 401k provided very specific rules are followed. For this reason it is important to work with an CPA or attorney that understands these rules.

        I am quite familiar with the IRS rule on prohibited transactions, and there's no rule that prevents co-investing with a disqualified party.  There are some guidelines you have to follow, but there's no blanket rule against partnering with your own account.

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