Buying Real Estate With Your Self Directed IRA – The Facts

Let’s continue the week’s question and answer series on Self Directed IRAs.

Can I use the money in my IRA for a down payment?

The short answer is yes. As usual however, there are rules. And the congregation responded in unison with a resounding Duh!! The IRS calls certain transactions ‘prohibited’. There are many factors cited that will turn the purchase of real estate into a prohibited transaction.

First and foremost you can never commingle your personal and IRA funds. Simply do not do it. No buts, no what ifs, just don’t. Also, you will not use your IRA as collateral for your loan.

Using a broad brush, it takes three factors to create problems for yourself in terms of a prohibited transaction for your IRA.

1. The IRA itself.

2. A disqualified person as defined by IRS rules. Examples would be, the owner of the IRA, their spouse, descendants and ascendants too. (And more)

3. Any transaction between 1 and 2.

This is why guaranteeing a loan is a prohibited transaction. You are a disqualified person — you can’t guarantee a loan made to your IRA — and that’s a good thing. The banks making real estate loans to IRAs know this. When they lend to your IRA, it won’t include your personal guarantee or any lame faux facsimile.

Back the truck up BawldDude, you said my IRA can serve as the source of the down payment, right?

The loan made to the IRA, and secured by the property, will be a non-recourse loan. What does that mean? If everything goes to hell in a hand basket, and the IRA defaults on the loan (an event I’ve never observed first hand), the lender can’t go after either you or your IRA — period. Again, a good thing.

So as long as you don’t personally guarantee the loan, and ensure the loan itself is non-recourse, you’re good to go. The (Self Directed) IRA can then provide funds for the down payment on the real estate you’ve chosen to acquire.

We’ll talk about loan terms and the like next time. I’d love to hear from you, so don’t be a stranger. Here’s my number — 619 889-7100. Call me. Have a good one.

Related posts:

1. Facts About Buying Real Estate Through IRA’s and 401(k) Qualified Plans
2. More Facts About Self Directed IRA – Real Estate Investing
3. Facts of Which Real Estate Investors Should Be Aware
4. Some Facts and Definitions About Self Directed IRA’s
5. Some Basic Facts About the Self Directed IRA