Plan loan term in excess of 5 years to pay for construction of primary

[Guest Fred Benefits]

A plan participant is building house that will become the participant's principal residence, and would like a plan loan with a term greater than 5 years.

Is using plan loan proceeds to pay costs of constructing a primary residence the use of a loan to "acquire" a primary residence within the meaning of section 72(p), such that the loan term may exceed 5 years? What authority supports the answer to the preceding question?

[Guest Mr. X]

He is acquiring the house the same as one that is already built in my estimation. Why do you see a distinction?

[Richard Anderson]

There may be a distinction. 72(p) was amended in 1986.

Currently 72(p) says "used to acquire a dwelling unit that, within a reasonable time, is used as the principal residence of the participant."

Before being amended in 1986 72(p) read "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 member of the family (within the meaning of section 267©(4)) of the participant."

Since "construct, reconstruct, or substantially rehabilitate" was eliminated from the language in 72(p) after amendment, I think that "acquire" might not include construction.

[Wessex]

See Q&A 5 through Q&A 8 of Treas. Reg. 1.72(p)-1. They are somewhat obtuse and I have not reviewed them recently, but I believe a loan for construction is permissible if structured properly.

If I remember correctly, the 1986 changes referred to by Richard Anderson were intended to correct perceived abuses in the "reconstruction" and "rehabilitation" areas.