IRA loan for SFR investment deal.

6 Replies

My wife and I have found the deal we have been waiting patiently for. Ultimately, we would like to use her IRA to fund the deal (flip). Has anyone had experience doing this? I am not familiar with the legality and tax position we would be in. (We are in MA)

How would this be different than fundraising with a private investors IRA?

Thanks in advance.

First learn the SDIRA rules on self dealing and disqualified parties. If you pass those requirements, then find a SDIRA custodian. Move her IRA into it. Set up a checkbook LLC. Have an attorney draft the promissory note and mortgage with your terms. (I'm assuming you will do a note secured with the property). Close, file in the local county court. Collect all the payments. File a Lien Satisfaction for the note when paid off. Your LLC can service the loan, ie, collect and deposit loan payments, report interest paid to the IRS. No tax implications as you will NEVER touch a penny of it outside of your IRA. No taxes until you request a 1099-R distribution out of your IRA (unless you have a Roth). You can skip the checkbook LLC but depending on the custodian they might charge transaction fees to deposit incoming payments.

Also your post doesn't say but if YOU were planning to flip the property yourself then forget it. You can't self deal. Your IRA can only loan to a non-disqualified party. That's probably the main difference from a private party loan.

Originally posted by @Josh Longtin :

My wife and I have found the deal we have been waiting patiently for. Ultimately, we would like to use her IRA to fund the deal (flip). Has anyone had experience doing this? I am not familiar with the legality and tax position we would be in. (We are in MA)

How would this be different than fundraising with a private investors IRA?

Thanks in advance.

You cannot borrow from your IRA. You can borrow from a 401k.

That said you can do an indirect rollover for which you have to refund an account within 60 days. That is typically not enough time for most investors.

@Josh Longtin

If this is your personal flip - there is no way you can use your wife's IRA to fund it (unless you take early distribution, which would be subject to taxes and penalties and wouldn't be wise financial choice).

You could set up a self-directed IRA for your wife and do the flip with the IRA, however there are number of implications you need to be aware of:

- You personally can't do any work, all work must be outsourced to independent third parties

- If you need to finance the purchase and rehab: loan must be non-recourse 

- Income from the flip might be subject to UBIT tax as it would be considered an active trade or business 

    I'm sure someone will chime in but I wanted to give a real life example. I used a 401K that had been rolled into an IRA and part was roth but mostly traditional. I didn't do a self directed IRA with a firm I did a cash it out and hand me a check. The tax and penalties at tax time on 25k were $4200. I would have paid that out in custodial fees with no access to the funds and I wouldn't have been able to add my sweat equity. This property was bought for the cost of the dirt. I don't recommend this I'm just saying what a I did. I've done a lot of the work on the place. Great learning. Would I do this deal again? Yep. And I'd finance it the same way if I had the same condition. House sits on 1 acre just south of Knoxville TN. The cheap 2 bed room 1 bath, which this is, runs $650 a month. For an acid test I worked for me.