Loan for primary residence

[Lou81]

Hello.

Participant is looking to take a loan to purchase a primary residence.    He is purchasing a house.  However, he is not planning on moving in right away, as he has a lot of repairs to do. 

Is there a time frame to consider this his primary residence?   

Thanks!

[Peter Gulia]

If the plan (including loan policy or procedure made under the plan) imposes no restriction or condition beyond those needed to meet tax law:

Internal Revenue Code § 72(p)(2)(B)(ii): “Clause (i) [limiting a loan’s term to five 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.”

Many plans’ administrators’ process claims for a participant loan accepting the claimant’s statements, made under penalties of perjury, on a paper or electronic claim form. A claim form often had been designed to paraphrase text from the statute, regulations, or both.

This is not advice to anyone.

[Paul I]

The answer is tied into the definition of "principal residence" (likely what you meant by "primary residence") which in turn is tied into other rules related to tax deductions allowed for interest on home mortgages and their associated tracing rules. See IRS Regulations 1.72(p)-1 Q&A-5, 6 and 7.

"Q-5: What is a principal residence for purposes of the exception in section 72(p)(2)(B)(ii) from the requirement that a loan be repaid in five years?

A-5: Section 72(p)(2)(B)(ii) provides that the requirement in section 72(p)(2)(B)(i) that a plan loan be repaid within five years does not apply to a loan used to acquire a dwelling unit which will within a reasonable time be used as the principal residence of the participant (a principal residence plan loan). For this purpose, a principal residence has the same meaning as a principal residence under section 121.

Q-6: In order to satisfy the requirements for a principal residence plan loan, is a loan required to be secured by the dwelling unit that will within a reasonable time be used as the principal residence of the participant?

A-6: A loan is not required to be secured by the dwelling unit that will within a reasonable time be used as the participant's principal residence in order to satisfy the requirements for a principal residence plan loan.

Q-7: What tracing rules apply in determining whether a loan qualifies as a principal residence plan loan?

A-7: The tracing rules established under section 163(h)(3)(B) apply in determining whether a loan is treated as for the acquisition of a principal residence in order to qualify as a principal residence plan loan."

The tracing rules deal with identifying when the acquisition indebtedness was secured by the qualified residence.  Also see IRS Notice 88-74 that defines acquisition indebtedness that provides an alternative of 90 days from the date of the loan as an alternative to the section 163(h)(3)(B) tracing rules in Q&A-7.

Frankly, I have never seen any plan loan provisions or plan loan policy provisions or related promissory notes that specify a time period by which time the participant must begin residing at the property.  Conceivably, provisions could be added to the plan or policy.  Further, participants could be asked at the time of the loan is requested to certify that the property will by occupied within the prescribed time frame.

If there is a lingering concern that somehow the extended time available to repay a loan for a principal residence, then consider something like it the property is not used as a principal residence within 5 years, the loan will be declared not to be a for a principal residence and will become immediately due upon reaching the end of year 5 of the loan term.

Keep in mind that if the plan imposes restrictions, then the plan must make them applicable to all similarly situated participants and must administer the restrictions.

[CuseFan]

5 hours ago, Peter Gulia said:

Internal Revenue Code § 72(p)(2)(B)(ii): “Clause (i) [limiting a loan’s term to five 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.”

Must resist temptation to post snarky political comment, already snuck one in yesterday.

[casey72]

i would tend to think that if the mortgage they're getting is for a principal residence then the plan should be comfortable with that designation as well.

[Lou81]

Thank you!