All Forum Posts by: Loren Whitney

Definitely prohibited. Some folks think to sell or deed the property to someone else and then buy it back with IRA funds but it doesn't work that way. Picture having the explain that one if you get audited by the IRS. Be careful of anything that could be construed as an arrangement too. The example above is a perfect arrangement scenario.

Great questions! I won't go into great detail today but feel free to check in in Monday. It's never a problem if disqualified persons partner side-by-side as long as no benefit or transaction takes place between the partners. Your situation is complicated in that your son's existing interest, even minority, may ultimately disqualify the partnership for your IRA because of his role or existing profits interest. The big picture you need to understand is that when partnering your IRA funds with your son, be sure that the investments are arms length and structured in an undivided interest. Everything must always stay separate in through administration and accounting. For example, you wouldn't want your son collecting rents for your IRAs portion of the business.

Originally posted by @Rich C.:

I currently have the funds available for downpayment and rehab costs in my roth IRA for a rental duplex (the rental duplex is bank owned and thus has no tenants). However I cannot qualify for a loan being an entrepreneur paying myself a tiny salary. I am wondering if I can have someone else, such as my parents, cosign the loan...and what the tax implications would be for this scenario. Perhaps I must stipulate my majority ownership through an LLC?

As the others have already mentioned, a non-recourse loan is the only type of loan that an IRA can secure. Non-resource really means that the only thing held as collateral for the note is the property itself. That being said, co-signers don't really help.

I've seen people try to partner their IRA funds with other individuals/entities that secure financing for their portion. The road block is that they'll expect all parties involved to sign on the note since they don't want partial security. This usually becomes a problem because traditional financing works its way into the equation.

If possible, let the IRA take on the leverage and then strategize for UBIT reduction where possible. I'm happy to answer other questions.

Best of luck to you!

Originally posted by @J Scott

I can appreciate a conservative legal opinion, so thanks for sharing J. I'll still have to disagree as a matter of opinion.

There is no material benefit to be had or expense spared as it relates to the IRA's real estate purchase contract. The seller of the property pays for the commission structure either way and so the IRA is not saving money by avoiding to pay for services. The IRA holder is also forfeiting any compensation to avoid self-dealing. In Colorado, a real estate contract can techinically be completed by anyone, not just a licensed professional. In a FSBO transaction, the IRA holder would most likely represent themselves on behalf of the IRA (licensed or not). As far as the contract is concerned, the important factors are:

1. Making sure that the contract is titled to the IRA, 401k, etc.

2. Requesting that an approved signer as custodian/trustee for the IRA/401k sign on the contract, not the IRA holder.

3. Earnest Money is not paid by a disqualified person.

Just because the IRA holder has a license to practice real estate, it doesn't restrict them from using their knowledge to write contracts for an investment. The same example applies to someone lending money on real estate if they choose to draft their own note terms. In my opinion, this very concept is what makes self-directing retirement funds more appealing to those with knowledge on a particular topic/investment. One just needs to be careful that the rules are followed to the T. There are many very similar scenarios that would fall into the prohibited category.

I have a differing opinion about acting as the buyer's agent on behalf of the IRA if you are a licensed real estate professional. Obviously you cannot take a commission because there would be a self benefit derived. However, I don't believe there is anything wrong with reducing your offer price as a result of waiving your commission. This comes down to technicality and the fact that your offer amount is the price paid. The contract would not have to say anything about your commission (or credit for it) as it would have to be zero. The IRA would not have had to pay for a buyers agent and therefore it shouldn't be considered an over contribution. This is merely my opinion but I believe it's correct.

I have a differing opinion about acting as the buyer's agent on behalf of the IRA if you are a licensed real estate professional. Obviously you cannot take a commission because there would be a self benefit derived. However, I don't believe there is anything wrong with reducing your offer price as a result of waiving your commission. This comes down to technicality and the fact that your offer amount is the price paid. The contract would not have to say anything about your commission (or credit for it) as it would have to be zero. This is merely my opinion but I believe it's correct.

Hey John, The individual 401k is definitely the superior plan but you should weigh all your options. Do you really want to do everything yourself? There are some full-service providers out there that don't only offer you the plan documents but also the investment administration. Think twice about using a one-time purchase plan document and be sure that if you do purchase a "package" that it comes backed with a promise to update the plan if rules change (re-statement of documents). Good luck!

Looks like most everything has been covered here. One thing I haven't seemed mentioned is an "in-service" distribution. If the 401k is with an existing employer, it's possible there is a provision within the plan documents that allow for a pre-mature distribution prior to retirement age or employment termination. Just another angle to check out if you haven't already done so.

Thanks for your feedback. Anyone else?

Hi everyone,

My family and I purchased our first home in May, 2012. We moved into our new home the same day we received our keys at closing and have loved everyday in the home since. Many life events have transpired since the acquisition of our home and after only nine months, we're planning on moving out of state to pursue a more fulfilling life.

So... I've decided to rent our primary residence. I realize there are many considerations and having worked closely with real estate investors over the last two years - I feel comfortable and capable. In fact, I've already screened and approved a very quality tenant for the property on a one year lease. All my math makes good sense and reserves/local networks are in place. I will be landlording myself and have backups in place as well.

The real reason for my post is to discuss my mortgage agreement that mirror Freddie Mac guidelines on Occupancy. I am required to occupy my home within 60 days (done) and use the home as my primary residence for at least 12 months. It appears I have an issue, yes? I know I'm not facing issues related to fraud because the life events that have occurred since our purchase could have never been foreseen.

A majority of people that I've already spoken to are telling me that this sort of thing happens everyday and as long as I make my payments, I shouldn't worry about the loan being called. Well, I'm a pretty conservative guy when it comes to finances and the "don't worry about it approach" doesn't exactly make me feel warm and fuzzy inside. That being said, I have avoided calling my mortgage lender to date in fear that they'll exercise their rights to call the loan or force me into a refi.

After reading about "extenuating circumstances", I don't think that they apply to my situation. I'm leaving a good job for another good job and my pay will only increase. My understanding is that extenuating circumstances are directly correlated to financial loss and an inability to satisfy the loan in question. Does that sound right?

I'm feeling like I have three options.

1. Don't say a damn thing and continue making my payments. Then call my insurance company come the 12 month mark to acquire a landlord policy.
2. Acquire a landlord policy now for "real" insurance coverage and hope the bank never says anything.
3. Call my lender and hope all goes well at their mercy.

I know the other obvious choice is to just stay put until the one year mark. Let's not go there okay...

Can anyone offer suggestions or input? I've already seen copies of denial requests from lenders so please don't repost those. :) haha

Thanks in advance for your collaboration and sorry for the long post. PS - Go Niners!