Self Directed IRA and Private Lending

[Guest Bobclp]

Has anyone heard of using an IRA to make a loan for a mortgage on a single family house. Loan would come from the IRA and the interest and principal payments deposited back in the IRA. Can you do this? If so, what are the pro and cons aside from investment/credit risk?

thanks

[Guest kdm]

According to Publication 590 from the IRS, borrowing from your IRA is a prohibited transaction.

[MGB]

kdm, I don't think he was referring to his own mortgage. He is asking if an IRA may be the creditor to another individual.

[Alan Simpson]

I actually have worked with an IRA holder that made loans from his IRA to other individuals (none of which he was related to). While this is permissible, the one major hurdle to overcome is finding a Trustee/Custodian for the IRA that will hold the notes as assets, ensure that the month payments are being received, and whose fees for these services will be reasonable.

[Bruce Steiner]

I've had clients do this.

[jpod]

Be careful: make sure that the age of the IRA holder, the length of the mortgage, and the amount of the mortgage relative to the IRA holder's other IRA assets won't cause problems with compliance with the minimum distribution rules after the IRA holder attains age 70-1/2.

[Guest Taxwoman]

My two cents…

First- making a loan from an IRA to anyone is a prohibited transaction and could disqualify the IRA. The transaction in question is considered an investment- not a loan , and generally occurs for private placements and non-publicly traded investments

With respect to holding a mortgage in an IRA, this is permissible if the transaction is done at arms length.

The transaction usually occurs as follows (assuming the IRA custodian permits the transaction)

As the mortgage is a private transaction, the IRA custodian will need to review the terms of the agreement to ensure that the prohibited transaction or any securities laws are not being violated.

They may also require a sample of the item (note) that will be held in the IRA

If the IRA custodian finds the documentation satisfactory, then they may require the following to effect the transaction.

Instructions from the IRA holder to pay the funds to the mortgage provider.

A subscription agreement from the mortgage provider.

The IRA custodian will then issue the funds to the mortgage provider, who will in turn, send the note to the IRA holder for holding.

Interest should be paid to the IRA custodian for the IRA

This is very general- IRA custodians/trustees may have varying procedural requirements. Check with your IRA custodian/trustee

[QDROphile]

Taxwoman:

A prohibited transaction is (1) a transaction between a plan and a party in interest (or disqualified person) or (2) dealing with plan assets for the benefit of a fiduciary.

If the IRA (plan) loans money to a person that is not a party in interest and no fiduciary benefits from the transaction, where is the prohibited transaction? Uness the IRA owner or other fiduciary gets a benefit outside of the economic benefit to the IRA (such as a loan fee paid directly to the owner or fiduciary), I don't think clause (2) is violated.

[Guest Liell]

I currently have four mortgage loans provided from my Roth IRA. I use a bank as trustee. Does anyone know how to get a list of valid trustees?