Owner financing within a self-directed IRA

I’ve always used my self-directed IRA to buy, flip and hold individual lots and never considered financing due to the non-recourse lender hurdles.

I’m interested in some raw land and the owner is willing to owner finance for 20% down. My question is this, if I have my IRA buy it do I need to do anything other than make certain I have enough in the IRA account to pay each month’s payment?

Unrelated business taxable income may be an issue.

What type of self-directed IRA do you currently own? Although I have used Equity Trust for many years, I would recommend a Total Control Self-Directed IRA. Essentially you change your custodian, set-up an LLC and corresponding LLC checking account. Voila, you now have checkbook control of your retirement account. Two restrictions 1) you cannot purchase collectibles-ie art, vintage cars, coins, etc. And you direct family lineage cannot benefit directly as a result of that investment. ie-you buy a house at your son’s college and rent it out to him.

It’s all about having the correct IRA setup. I recommend Elite Pensions.
Ps, another benefit, just one upfront fee, and no recurring charges like the ones i pay w/equity trust.

let me know if interested and i will point you in the right direction.

all the best, bill whforrest3@yahoo.com

In a self-directed IRA, don’t you need to have 5% owned by somebody not in your lineage?..A brother or sister is okay, but not children, parents???

The IRA is owned 100% by the tax payer. The ownership rules you mention apply to prohibitted transactions.

I was looking at doing this last year…There’s very specific rules on using a self-directed IRA…There’s definitely a 5% “outside” rule (your spouse, children, and I think parents cannot own the 5%), whereby somebody outside of the above listed have to own 5% of the partnership…If I can dig up the website, I’ll post it here later…

It’s not an easy situation to set one of these up, at least not for what I was going to do…Maybe the rules are different depending on the intended usage?

Does somebody here work in this field who can provide some expert insight (CPA, tax attorney, etc.)?

There are no special rules for IRAs versus self-directed IRAs. All IRAs are subject to the same rules. IRA custodians choose to limit investments in their products to only those things they offer. Brokerage companies allow investments in stocks, bonds, and mutual funds they can sell. Banks offer CDs and money market accounts. None allow investments in private companies or real estate because they can’t make any money managing those products. SD custodians make their money on the annual and quarterly fees and by charging every time a document is processed. They don’t manage the investment. They manage the transaction.

The IRS forbids IRAs from investing in certain assets (e. g. collectibles, artwork, precious metals and gems) and forbids the IRA from doing any business with disqualified individuals (e. g. lineal descendants) and any business where the IRA owner and disqualified individuals own more than 50% of the shares. Violating these rules can lead to a determination that IRA funds have been distributed early and income tax and penalties apply. There is also Unrelated Business Taxable Income if the IRA uses recourse financing to purchase investments or runs a business. Traditional IRAs don’t have this concern because the custodian doesn’t allow these transactions.

As with Buffinvestor, I am confused by what I gleaned from the www.penscotrust.com website - something about it’s a no-no to have plan assets held 100% by the self-directed IRA. Please see below from the Penscotrust website:

Example II

Allison wants to form an LLC that will buy property that will be developed. She wants to make her IRA the primary investor. She expects to have other investors in the LLC.

Allison’s IRA can participate in the formation of the LLC provided Allison and related persons and parties do not already own 50% or more of the LLC in aggregate. If she is just starting the LLC, then the IRA can own something less than 100% (e.g., 90%). The LLC is considered a real estate operating company and, therefore, the assets are not considered plan assets unless there is 100% ownership by the IRA. If the company’s assets are deemed plan assets, then a transaction between the company and the IRA owner is considered a transaction between the IRA and a disqualified person (such as the IRA owner) and is therefore possibly a prohibited transaction. Because of some recent legal rulings involving self-dealing, we recommend that you consult with a competent attorney if you intend to have a personal role in any entity in which your IRA is an investor.

If the LLC was not a real estate operating company or other type of operating company (for example, if it was a hedge fund), then the aggregate ownership of all IRAs and employee benefit plans would have to be less than 25% in order for the LLC’s assets not to be considered IRA assets. (The interest owned by the IRA owner is disregarded for purposes of calculating the relevant percentage.)