The Basics
First Example
Bob’s IRA has purchased a single family home from someone other than family. Bob now wishes to have the IRA sell it to his sister with a first mortgage that his IRA will hold. The purchase of a single-family home from an unrelated party is not a problem. Bobs IRA pays $300,000 cash and his IRA holds the grant deed from the sale to his IRA by the third party. Bob's IRA later sells his sister the property and takes back a first mortgage and a down payment in exchange. His IRA gives her a market rate loan for 15 years and receives a 10% down payment. Since this is a $270,000 debt owed to the IRA and not by the IRA, the IRA is not violating any regulations. Bob's IRA has a fixed income investment and is protected because it holds the trust deed in the event his sister defaults on the loan. The transaction may also have the incidental benefit of allowing Bob's sister to purchase the home more easily than she could have on the open market.
Second Example
Jennifer has formed an LLC that will buy property that will be developed. She wants to make her IRA the primary investor. She has friends that also will invest in the LLC. Jennifer’s IRA can participate in the formation of the LLC provided Jennifer and related persons and parties do not already own 50% or more of the LLC in aggregate. If she is just starting the LLC, then the IRA can own something less than 100% (e.g., 90%). The LLC is considered a real estate operating company and, therefore, the assets are not considered plan assets unless there is 100% ownership by the IRA. If the company's assets are deemed plan assets, then a transaction between the company and the IRA owner is considered illegal. Because of some recent legal rulings involving self-dealing, we recommend that you consult with a competent attorney if you intend to have a personal role in any entity in which your IRA is an investor.
Third Example
Steve wants to have his IRA purchase a $400,000 rental property with a 50% down payment. This is possible, but without the pooling of other people’s IRAs, the IRA will be subject to tax (UDFI or UBIT) on any income and/or capital gains attributable to the leveraged portion of the investment. The beautiful alternative to borrowing would be to have the IRA purchase the property with other IRA parties, all of whom pay cash. When this is done, there is no UDFI and there are no issues associated with the financing.
Bob’s IRA has purchased a single family home from someone other than family. Bob now wishes to have the IRA sell it to his sister with a first mortgage that his IRA will hold. The purchase of a single-family home from an unrelated party is not a problem. Bobs IRA pays $300,000 cash and his IRA holds the grant deed from the sale to his IRA by the third party. Bob's IRA later sells his sister the property and takes back a first mortgage and a down payment in exchange. His IRA gives her a market rate loan for 15 years and receives a 10% down payment. Since this is a $270,000 debt owed to the IRA and not by the IRA, the IRA is not violating any regulations. Bob's IRA has a fixed income investment and is protected because it holds the trust deed in the event his sister defaults on the loan. The transaction may also have the incidental benefit of allowing Bob's sister to purchase the home more easily than she could have on the open market.
Second Example
Jennifer has formed an LLC that will buy property that will be developed. She wants to make her IRA the primary investor. She has friends that also will invest in the LLC. Jennifer’s IRA can participate in the formation of the LLC provided Jennifer and related persons and parties do not already own 50% or more of the LLC in aggregate. If she is just starting the LLC, then the IRA can own something less than 100% (e.g., 90%). The LLC is considered a real estate operating company and, therefore, the assets are not considered plan assets unless there is 100% ownership by the IRA. If the company's assets are deemed plan assets, then a transaction between the company and the IRA owner is considered illegal. Because of some recent legal rulings involving self-dealing, we recommend that you consult with a competent attorney if you intend to have a personal role in any entity in which your IRA is an investor.
Third Example
Steve wants to have his IRA purchase a $400,000 rental property with a 50% down payment. This is possible, but without the pooling of other people’s IRAs, the IRA will be subject to tax (UDFI or UBIT) on any income and/or capital gains attributable to the leveraged portion of the investment. The beautiful alternative to borrowing would be to have the IRA purchase the property with other IRA parties, all of whom pay cash. When this is done, there is no UDFI and there are no issues associated with the financing.
