Planning Your Self Directed IRA Purchase

We are frequently asked about purchasing real estate with retirement funds by people who do not have enough funds in their self directed IRA, 401k or other retirement account to finance the entire purchase. What are their options?

Prospective self directed IRA, etc. purchasers should be aware that there are several options for financing. Private and institutional lenders can provide non-recourse loans for investment real estate purchases at competitive rates. Some lenders specialize in these types of loans. However, loans to a self directed retirement account must be non-recourse. Only the account itself can be the borrower, e.g., the account owner can neither sign the loan nor guaranty it. Additionally, the promissory note can only allow foreclosure on the property upon default and cannot allow the lender to go after the account or its owner. As a result, lenders who loan to self directed retirement accounts typically require no less than 40% buyer equity and may charge an interest rate more aligned to rates for the purchase of commercial properties.

The retirement account owner should give thought not just to the purchase price but also to closing costs, commissions, documentation fees, and other charges typically associated with real estate purchases. Also, its not a good idea to use one's entire retirement account to acquire the property. For example, if a person wished to purchase a $200,000.00 investment house, and used all of their funds for the purchase, and the house subsequently needed a major repair, any use of personal funds would be deemed an early distribution subject to penalties, and could even result in disqualification of the entire retirement account. Therefore, thought must be given to maintaining a sufficient reserve in the self directed IRA (or 401k) account to cover repairs and maintenance that are required downstream.

IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.