FROM THE DESK OF A SELF-DIRECTED IRA EXPERT KAAREN HALL
Bill gave me another call a week later and he revealed his full plan.
He had found a great deal on a 4-plex and was thinking of buying it
with his IRA. First I explained again that the name of the buyer was
“Custodian FBO IRA-Owner”. I also explained that Bill did not sign
the offer to purchase himself, but rather he was to give that
information to us and we would have the contract signed and
returned. He wanted to know why he could not sign the offer to
purchase himself so I explained the custodian signs purchase
documents on behalf of the IRA. The IRA-owner can sign as “read
& approved”.
Next came the issue of leverage. Bill wanted to use his IRA as a down-payment on the property. I explained
that IRAs are not down-payments (unless the IRA itself is getting a non-recourse loan). Typical lenders do
not allow IRAs to be a party to the note because there is no recourse against an IRA. It is possible, however,
to have the IRA itself borrow the funds. There are non-recourse lenders out there who make loans to IRAs.
The loans are based on location, condition and cash-flow. Sometimes lenders actually want to see a rental
agreement signed before they’ll close on a loan like
this.
These kinds of non-recourse loans are like
commercial
loans
and
they
have
high
LTV
requirements. The IRA may put 50% into the deal, for
example. I provided Bill with a list of non-recourse
lenders.
When IRAs do borrow money with non-recourse loans,
the IRAs can be taxed.
The tax is called UDFI
(Unrelated Debt Financed Income Tax). Any property
held to produce income is “debt-financed property” if at
any time during the tax year there was acquisition
indebtedness outstanding for the property. This UDFI
tax is at the same rate as the estate tax rate (currently
35%).
You can read more about this tax at
www.IRS.gov Pub 598. Your CPA reports this on a
Form 990t.
So now we had cleared up the issues of “buyer name” and the use of leverage.
At this point in the
conversation Bill tells me it was his intention to purchase the four-plex and have his son live in the property.