Principal residence loan

[Doghouse]

This seems to be coming up a lot with the current credit debacle. A loan is being requested for the acquisition of a principal residence (term > 5 years). This principal residence will in fact be the participant's primary residence, but the ownership will be in someone else's name (a sibling in my current instance).

Do you think it still qualifies as a principal residence loan? Is there a requirement that the borrower is intended to hold title to the property? The sales contract to be submitted as supporting documentation will not mention the participant at all.

[ETA Consulting LLC]

You make an interesting point. The rules defining principal residences are outlined in Section 121 of the Code (and explained in details in the Regulations). Interestingly enough, the facts and circumstances on determining "Principal Residences" does not require ownership. For the $250K special tax treatment when you lived in the house for two of the last five years requires both 1) Ownership and 2) Principal Residence. Therefore, the code and the Regs appear to differentiate actual ownership with principal residence and suggest that ownership is not required.

To further support this, it's not even a requirement that the loan is secured by the residence. It will still remain secured by 50% of the vested account balance. So, if the facts and circumstances are there to prove this is a principal residence, then I could see that loan being extended.

My only point of contention that continues to get me is the fact that it reads "principal" and not "primary". Principal in my mind has always implied ownership, but that's just me and my limited vocabulary. Secion 121 appears not to create that link, and implies that principal simply means primary and does not imply ownership.

I would issue the loan.

Good Luck!

[david rigby]

DL?

[Belgarath]

I'd call it a pretty aggressive approach. However, I don't know. I don't know if there are any PLR's on this specific question. If there aren't, I'm betting htat if you did apply for a PLR, you'd get a negative response. I'd certinly run this by a good ERISA attorney for a risk assessment before undertaking the transaction on this basis.

[Bird]

I'd call it a pretty aggressive approach.

Me too - at best. Our plan language, which I think comes from the regs, is:

a loan term may extend beyond five years if the loan is used to acquire a dwelling unit which within a reasonable time (determined at the time the loan is made) will be used as the principal residence of the Participant.

It's certainly implicit to me that it's the participant who is to acquire the dwelling unit. It's not said if in this instance the money will be gifted or lent in turn, but arguably the loan is not being used to directly acquire the principal residence - it's either being gifted or lent to someone else. I don't think you can look through to the second step.

[masteff]

I'm w/ Bird. I can't get past the word "acquire" which is used in both the 72(p) code and regs. I don't have my Black's Law Dictionary at work but I find it hard to see a definition of "acquire" that does not include the taking of some ownership or right of possession. As Bird said, it looks and smells more like a gift from the part to the sibling (and if it's over the gift limit, then subject to gift tax). If nothing else, you're lacking (or at least fail to mention) a formal element between the participant and the sibling that negotiates the right to reside in the house in exchange for the money being provided. But I'd talk to my ERISA atty first to see what they think would be sufficient to change this from "gift" to "acquired".

Edit: and how do you determine a reasonable loan term if you don't know how long the participant has a right to reside in the house?

[Doghouse]

Thanks all - I will do just what you have suggested and tell them that it would be aggressive to grant the loan as a principal residence loan, and that if they want to take the more aggressive position they should consult with an ERISA attorney first. I doubt they will take on that expense, considering that the borrower is just one of the office staff and the amount of the loan is only $10,000 - instead they will likely just deny it.