One of our New Direction IRA client representatives recently
spoke with a prospective client who asked us to frame some ways for his IRA to
help a cousin buy a home. The cousin has a good job, but he wasn’t sure about
his credit rating nor did he have the money for a down payment. We spent some
time talking about the ways that IRAs can participate in real estate and the
IRS rules associated with that participation. Below is an excerpt that was sent
to the cousin to get the ball rolling. If you are in a similar situation,
perhaps this may help you get your thoughts together.
Scenario 1 – My IRA buys the house (the
property would literally be deeded to the IRA). It secures a non-recourse loan
to do this. Typically, a lender will want 30-40% down. So our max purchase
price would be about $150K I am guessing. You would pay rent to the IRA or we
can set up a rent-to-own agreement. This set-up, depending on the purchase
price might leave me with little cash; so, you may need to pay for any
unexpected repairs, which of course, would come off the rent or be recognized
in some way. The advantages to this method is that you would not have any
initial cost and would not have to qualify for financing. And, you could buy my
IRA out whenever it was feasible for you.
Scenario 2 – We buy the house as
tenants-in-common. My IRA and you are the deed holders, each owning a
percentage of the house. This can be kind of fluid but the basic idea might be
that I put in the ~$50K, and you come up with the rest. If you need financing
for your part, the collateral for the loan would have to be something other
than the house. It would also be helpful for you to let me know what your exit
strategy might be. In this set-up, I really just contribute the IRA money in
exchange for a percentage ownership in the house, but from that point, pretty
much all the financial burden would fall on you.
Scenario 3 – I can simply loan you the
money that I have available and we can set up the rate, term, and such in a way
that is financially possible for you. Like interest only for several years,
with a balloon payment down the road or some such. This set-up would mean that
you are the deed holder, and the financing would be whatever you can work out.
Because you are a non-disqualified person to my IRA, we
have a good deal of flexibility in how we set this up. In part, it will come
down to how you want to play it and what your financial options are. One thing
that I will mention is that my IRA’s participation always needs to be titled as
the IRA. The important thing is to not put just my name on an offer or any type
of legal document.
As a point of clarification, disqualified persons to an IRA
include the IRA holder, their spouse, and lineal ascendants and descendants
(and their spouses). However, the sides of the family tree, siblings, aunts and
uncles, cousins, etc. are not disqualified persons.
