ERISA rules

[Guest REIL guy]

I understand that one can hold RE in their IRA. I have found a guy that will loan me money for the transaction (downpayment will come from my IRA), but the terms are harsh. The reason, he says, is that under ERISA, I cannot be qualified for the loan personally. I am having trouble finding this ruling, any help out there?

[mbozek]

While an IRA can own RE, using an IRA asset as collateral for borrowed funds will result in unrelated business taxable income when the asset is sold at a 39% tax rate. See IRS publication 590. Also the use of an IRA to benefit the IRA owner's personal account is a prohibited transacton under IRC 4975 which will result in the entire IRA being taxed to the owner. You need to retain tax counsel to determine if there is any way to have the IRA own the RE. I have a question for you - why do you want to put RE in your IRA? There is no cap gains. Have you checked your agreement with the IRA custodian? Few custodians will allow RE in an IRA because of liability risk for negligence or envoronmental issues.

[Guest REIL guy]

I don't know if I described it correctly. My trustee will hold the property for the benefit of my IRA. The property will not be actually in my IRA. The actual note and deed are with my trustee, thus no UBTI. Since the note will be a non-recourse note, ERSA/IRS shouldn't have a problem with the transaction. Why would I do this? If all the excess rent and, down the road, all the equity built up going into my ROTH that I can then invest in anything I wish, why not? I don't want to use all my IRA to purchase the home, so the loan seems to work. I just don't understand why they can't use my FICO score or something so that the terms would be better.

[Erik Read]

More than likely because if the IRA defaults on the loan payments, you cannot fund the IRA with capital to make the payment... are you following? The restrictions on the IRA limit the way you can collateralize the loan. Much the same that if you were to default on loans ERISA money is not usually reachable by your debtors. I'm not positive that the IRA should fall into that same class as the assets aren't secure from collectors, but I can understand why they can't use your FICO scores if your personal ability to make payment can't be used in the determination of credit worthiness.

Hope that helps a little.