Can I Use A Self-Directed IRA To Do This?
Here's my problem. We did seller financing on a mixed-use property. The buyer stopped making payments and is in arrears four months. We don’t have the funds to foreclose in the City of Philadelphia. I was quoted min $3000-$5000.
An out of town investor who got our names from the public records expressed interest in purchasing the non-performing note for at most 50% on the dollar. There is roughly $23,000 is left on the mortgage. He said there was another way out. I could convert my Traditional IRA ($20000) to a Self-Directed IRA.
1. Could I then buy the non-performing note from my mother for lets say $15,000?
2. Could I then use $3,000-$5,000 (the cost of foreclosure) of the self-directed IRA to foreclose on the property?
3. Would I just have to make sure that any proceeds went back into the Self-Directed IRA?
4. Is there a way to use a Self-Directed IRA in the acquisition of RE and put some money in your pocket?
Any light you guys can shed will be well appreciated.
Thanks a bunch.
gi
I am not an IRA expert, but your plan sounds like self-dealing, which I think is prohibited.
Since it appears that your goal is to recover the property, offer your buyer the opportunity to give you the deed in lieu of foreclosure. If the buyer accepts, then no immediate out of pocket foreclosure costs and you regain control of the property to sell again.
If you have to foreclose, add the foreclosure costs to your loan balance (including arrearages and accrued interest) to get your minimum payoff. At the foreclosure auction, bid up to that amount, then drop out of the bidding. You get paid in full and the foreclosure costs are taken care of from the sale proceeds.
If you happen to get the property back through foreclosure, can you refinance the property to get the funds to pay your foreclosure costs?[ Edited by NewKidinTown2 on Date 10/05/2004 ]
4. Is there a way to use a Self-Directed IRA in the acquisition of RE and put some money in your pocket?
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Yes, a self directed ROTH IRA can be used for this. The profit from your sale in the Roth is non-taxable if the Roth made the purchase. If you convert a Traditional into a self directed, you will pay taxes on the distributions when you retire. The Roth eliminates this because the Roth is funded by post-tax funds, not pre-tax as the other 2.
The problem with using your IRA to fund your real estate flips, is that you bring Unrelated Business Income Taxes into play.
Normally, conducting a business from within your IRA is a prohibited activity.
Here's a link to a great company that deal with self-directed IRA's. There's great info on this site:
http://www.trustetc.com/links/realestate.html
You ask if you could buy the non-performing note from your mother. Does she own the note now??
Look over the website above. There is some restriction about the self-directed IRA doing deals with immediate family. As I recall there is some exception such as sister / brother, cousins, etc...but I think parents, spouse and children are disallowed.
Good Luck!
It is largely correct to say that you can use a self-directed IRA for a real estate transaction.
What you can not do is use the IRA for property in which you have a prior interest or a future interest. The self-dealing comment. I suspect that if you sell the note to you mother and then use your IRA to buy it you will fall foul. It is not clear who owns the note now so the advice might be slightly off.
The range of things you can do with a self-directed IRA is a bit more limited then doing the same in your name so do your homework.
As to selling the note for 50%. That is pretty good as many buyers would expect a larger discount. If the borrower wants to tie things up they can create more problems.
Before selling for 50% discount you could try to work it out with the borrower. You get the place back and they do not get a black mark from a foreclosure or similar. I can come up with more ideas along this line so it is really a question of what you would consider and how long you want to wait, etc. If you take the place back you need to sell it again, etc.
John
[addsig]
just call the co. holding the ira they will know all the regs.......km
p.s or they can direct you to the answer
Hi Guys,
Thanks so very much for your help. You have really, really helped me. I was able to track down the Mortgagor of my mom's $23K note. He said he would be interested in buying it for a discount. He said somewhere around $15K. I'll be dancing a gig if I get $10K based upon all of the violations Licensing and Inspection of Philadelphia said the building had on it (12 in total). This guy ended up being a Slum Landlord. L & I will send me a list via USPS of the named violations. I sure don't want the building back. I couldn't afford to fix it at this time: currently unemployed. He said he would fax me an offer sometime today. I can only pray he follows through. Boy, I learned some valuable painful lessons with this deal. I had done some reading on creative RE techniques and put together a creative seller-financing offer on two properties for my mom. They weren’t selling and we wanted to get rid of them. The 1st deal went great: got top dollar for the property. The 2nd deal: well as you may know, didn’t go so well.
Unfortunately, the only savings I have left is $2500 and a Traditional IRA (balance is ~ $23,700). Unemployment will run out in November. By God’s grace, all my bills are paid off: only living expenses to be concerned about.
I've got to find some motivated sellers, then make and shake some serious deals. I need to generate cash ASAP and I have no money and decent credit, so I figure flipping is the way to go (any comments as always are greatly appreciated).
If I could just somehow get my hands on some of my IRA, boy that would help things go a lot smoother. The post is no longer up but one member mentioned that options could be used to pull money out of a Self-Directed IRA. The websites did answer most of my questions. Hopefully, I will find out the answer to the Options question when I contact Equity Trust and Pensco directly. I’ll keep you posted.
gi
If you want to know more about IRA accounts and how to use them, try and read up on the IRS 590 Publication.
The link to their site is:
http://www.irs.gov/pub/irs-pdf/p590.pdf
I hope this helps!
Good Luck,
Harley