Self-directed IRA Mortgage

4 Replies

I have been looking at mortgages for an investment property. I have not exhausted my options, but so far the market for these mortgages doesn't seem great. I have excellent credit, 800+ FICO. Best option I have heard so far was 5%, 20% down and 2 points. I will keep looking for other options, but as I started thinking, I recalled using a self-directed IRA to buy real estate. I have a pretty healthy IRA balance. I don't want to buy the real estate through my IRA, since my goal is to start building a portfolio to offset my current income and eventually do this full time. I was wondering, could I use a self-directed IRA to create a mortgage to myself to buy this property? Essentially, the IRA is investing in mortgages. I know there are certain arms length type restrictions. I figure I could charge myself a prime rate mortgage of between 3.635- 4%, pending prevailing market conditions. Even if I had to charge myself more, to satisfy any IRS requirements, I am okay with that since I would be paying the interest to myself. Would this hold water? Would I still be able to deduct mortgage interest since the IRA account is a separate entity from myself? I realize the big downside is if the market has a nice positive set of years, I would miss out on that in my IRA, but at the same time I am limiting my downside by essentially guaranteeing a 4% return. Also, this would only be a portion of my IRA, the rest would be invested in mutual funds.

@Juan Nieto

You may not transact with or benefit from your IRA in any way. To have your IRA lend to you (or a business owned by you or family) would be a self-dealing prohibited transaction and would invalidate the IRA - with severe tax consequences.

An IRA may invest in many diversified ways, but the whole point is for the tax-sheltered IRA to invest exclusively for the benefit of the IRA. If the IRA can be invested in stable assets that produce consistent income - such as rental property or mortgage notes, then you can perhaps do better creating wealth for your future self. Just like an IRA in the stock market, you cannot touch it until you turn 59 1/2.

The exception here, as I've been advised, is if you pool your (self directed) IRA monies with other investors, even if the other investor money is not from IRAs. But there are other rules to be careful about; you can't, for instance, leverage the IRA funds or pool exclusively with relatives. So, you can use those pooled funds (with your IRA money) to finance a property you buy, but you can't use those funds for a down payment.

I'd be grateful to hear if I've been wrongly advised...