Primary Residence Loans

[Guest Julie]

We have an employee applying for a primary residence loan -- to be paid over a 10year period. Her husband is going to be the contractor. The only documentation she provided was an excel spreadsheet with a breakdown of the work, who was going to complete the task, and an estimate of the work. She also provided several estimates, one from the local lumber company, a cabinet maker, etc., but they were dated in February and March 2004 -- it's almost November! One thing that bothers me is that none of the estimates were signed as being accepted by either parties.

I am not doubting that her and her husband are building a house. I'm concerned about the documentation provided. I'd really like to know what the IRS will look for in documentation if they came knocking on our door. I've searched the web for answers, but couldn't find anything concrete. In fact, now I'm beginning to wonder if she can even take a primary residence loan since everything I've read refers to "purchase of a primary residence" not building one. Help!!!

[Harwood]

IRC 72(p)(2)(B)(ii) has read since 1986: The maximum loan period of 5 years "shall not apply to any loan used to acquire any dwelling unit which within a reasonable time is to be used (determined at the time the loan is made) as the principal residence of the participant."

Construction loans were specifically removed from this clause. Prior to 1986, IRC 72(p)(2)(B)(ii) allowed for a longer loan repayment period for: "any loan used to acquire, construct, reconstruct, or substantially rehabilitate any dwelling unit which within a reasonable time is to be used (determined at the time the loan is made) as a principal residence of the participant or a member of the family (within the meaning of section 267©(4)) of the participant."

A "conservative" Plan Administrator would not allow longer loans for construction purposes.