“Hey Quincy – wife and I met you on IRA Fun Cruise in January. This is a rookie question. Sceanario: we buy an investment property through one of our Roth self directed IRAs. We plan on putting 20K down and getting seller financing for the balance of purchase price. The property is tenant occupied with a Property Manager in place. The property is currently in a land trust and I believe seller wants to use a land contract of sale to sell to our IRA. #1, is that type fo sale to us considered “non-recourse”? #2, from the purchaser perspective, what is your opinion on buying property through a land contract of sale? Thanks so much.”
That is a great question. Whether the debt instrument is a land contract or a deed of trust or a mortgage, it has to be made clear that the only thing the lender can do is take the property back from your IRA. There would need to be language in the land contract (generally just a short paragraph) making this clear. As to your second question, in some states that is a very common way to sell property, while in other states such as Texas it is fairly rare. You would need to get some local advice on that issue, unfortunately.
The only other thing that comes to mind is that this may cause your IRA to owe Unrelated Business Income Tax (UBIT) on the profits from this property. I just finished recording a webinar on this topic with Matt Allen of North American Savings Bank (www.iralending.com) which should be up on the website soon. Also, we have a more extensive webinar that we have recorded on this subject which you can find on our website, as well as written materials. I wasn’t sure how well versed you were with the rules for debt-financed property within an IRA.
Let me know if you have any other questions. Have a great day!
I understand my self directed Ira cannot lend to my daughter. But what if my Realtor borrows money from my IRA to buy a house and then sells that house to my daughter on a wrap,and some time later decided that he wants to sell out his equity in the wrap, could my IRA buy that note?
Thank you for your question. The answer is no, your IRA cannot buy the note. There can be no direct or indirect benefit to a disqualified person (which your daughter is). Loaning money to your Realtor with the intention that the Realtor sell the house to your daughter on a wrap is only attempting to do indirectly what you cannot do directly, which is to benefit your daughter by facilitating her purchase of a house through the lending of money from your IRA. This is likely to violate more than one of the prohibited transaction rules.
For your reference, see Internal Revenue Code Section 4975(c)(1)(B), which prohibits the direct or indirect lending of money or other extension of credit between a plan (including an IRA) and a disqualified person. Also, you may be interested in Advisory Opinion Letter 2011-04A (Warfield), where the applicants asked if they could purchase a loan with their IRA that they owed to a third party bank who had loaned them money several years earlier. The Department of Labor ruled that the entire loan transaction needed to be reviewed from beginning to the end for prohibited transactions. Even though the loan was obviously not a prohibited transaction when originated, the purchase of the loan from the bank and the subsequent payments to the IRA would be prohibited transactions. Finally, to quote the Tax Court in the recent case of Fleck and Peek v. Commissioner, “Section 4975(c)(1)(B) prohibits “any direct or indirect * * * extension of credit between a plan and a disqualified person”. (Emphasis added.) The Supreme Court has observed that when Congress used the phrase “any direct or indirect” in section 4975(c)(1), it thereby employed “broad language” and showed an obvious intention to “prohibit something more” than would be reached without it. Commissioner v. Keystone Consol. Indus., Inc., 508 U.S. 152, 159-160 (1993).”
I know that’s not what you wanted to hear, but it’s better to ask questions now than to destroy your IRA and possibly owe taxes and penalties. Have a great day!