Self-Directed IRA Investing

An educational blog by Tom Anderson, PENSCO Trust Company Founder & Vice Chairman

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Need to loan money to your Self-directed IRA?

August 19th, 2008 · 5 Comments

Suppose you purchase a rental property by using your self-directed IRA as a down payment, and then your IRA obtains a non-recourse* loan from a bank. Next, you find a tenant and the rent just covers the mortgage payment. Everything runs along fine for a year, and then suddenly your tenant moves away and there is no income to cover the mortgage payment. If you don’t have cash reserves in your IRA, have no other IRAs or qualified plans to roll over to it, and have already consumed your annual cash contribution for year, you could be in trouble. Right? Maybe not. There is a little known exemption that was designed by the Department of Labor for just this scenario. It is called Prohibited Transaction Exemption (PTE) 80-26, as recently amended, and it applies to both IRAs and pension plans.

*non-recourse means that the IRA owner cannot guarantee the loan for his or her IRA.

Loans from IRAs owners (or other disqualified persons) to IRAs have been permitted for many years provided the loan was unsecured and interest-free. However, the purpose of the loan is important and in order to satisfy the exemption the loan must be for the payment of ordinary operating expenses (e.g., the mortgage) or for a purpose incidental to the operation of the IRA. In other words, not to be used for an additional investment, or other purpose. While the exemption is not new, two elements have changed recently: 1) the former 3 day term limit for the loan has been removed and 2) provided the loan is documented in the form of a note from the IRA (borrower) to the lender (IRA owner) and given to the custodian for all loans over 60 days in term. Also, there is no limit on the amount of the loan.

So if you’re thinking about increasing the yield on your IRA’s investment in real estate by using leverage, but worried that you might run out of cash to pay the bank, here is your solution.

Tags: self-directed IRA

5 responses so far ↓

  • 1 Jeffy Boyle // Oct 26, 2011 at 10:31 am

    I’m assuming that this type of loan also applies to Solo 401k since it is qualified plan, correct?

  • 2 admin // Oct 26, 2011 at 2:14 pm

    Yes. Works for Solo(k)s providing custodian allows it. Tom.

  • 3 Mike H. // Nov 29, 2011 at 5:26 pm

    Tom, in light of newly released DOL Adv Opinion 2011-09A, do you still think an 80-26 loan for payment of a mortgage in the IRA would qualify under one of the two requirements for such a loan?

  • 4 admin // Nov 29, 2011 at 5:53 pm

    Absolutely. It is even spoken to in the 2011 advisory: that an IRA owner can extend a loan to his or her IRA provided the funds are used to pay for ordinary operating expenses (e.g., mortgage interest, insurance premiums, etc.). I see nothing in 2011-9a, which is about an entirely different scenario that changes the purpose of 80-26. Tom.

  • 5 Jessica T. // Nov 8, 2012 at 7:44 pm

    Do you have a list of non-recourse lender that you could provide?

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