First of all, is it legal for an investor to buy real estate with his IRA? Absolutely! Tens of thousands investors nationwide legally do so.
But the investor must be absolutely sure not to personally guaranty any mortgage on the property!
If the investor personally guarantees a mortgage secured by a property owned by his IRA, the IRS will declare the personal guaranty to be an illegal contribution to the IRA. It is the position of the IRS that personally guaranteeing the loan produces a lower interest rate from the bank. The entire IRA will be declared invalid, and the investor will pay billions and billions of dollars in income taxes, penalties and interest to the IRS. (Who remembers old Carl Sagan, the astronomer? He popularized the term when he told us about the billions and billions of stars in the galaxy.)
Commercial loan brokers, you need to know this stuff. If you arranged a commercial loan for an IRA to buy a property, and that commercial loan required a personal guaranty, you can bet that the borrower is going to come after you for the billions and billions of dollars in penalties that he will have to pay.
But the IRA investor can simply get a non-recourse commercial loan, right? 'Rots of ruck with that challenge. After the Great Recession, very few banks will make non-recourse commercial loans.
My own hard money shop, Blackburne & Sons, however, will gladly make non-recourse commercial loans for your IRA.
You may have noticed that Blackburne & Sons has recently been pitching the idea of 9% first trust deeds to the wealthy investors who use C-Loans.com. We have been doing this for over 30 years - turning former commercial property borrowers into trust deed investors. It's an easy sell. These wealthy guys are already comfortable with commercial real estate.
One of our private clients called the office this week asked if he could use his IRA to invest in first trust deeds. The answer, of course, was yes; but he has to set up a self-directed IRA first. He can't just hold title to a first trust deed as "Bob Smith's IRA".
An IRA is, by definition, an account at a bank. The operative words here are,"at a bank." Your investment has to be in a type of bank account. Self-directed IRA accounts, where some bank serves as the custodian, have been existence for over 30 years. "Bank of Colorado, as custodian for the IRA of Bob Smith" would be the proper vesting.
You guys know that I am an attorney, and I have to take Continuing Legal Education classes to maintain my license. I took a CLE class this week about retirement accounts, and our instructor told us this story.
Are you going to eat that last piece of cake?
An investor bought a commercial property using his IRA, but he ordered his IRA custodian to just send a check to the title company for the purchase price. Title to the property was vested as "Bob Smith's IRA". At the end of year, the IRA custodian reported to the IRS a withdrawal of $900,000. Oopsie. The buyer didn't use a self-directed IRA to serve as the custodian for his IRA's purchase of the property.
The IRS then socked this poor guy with income taxes, penalties, and interest amount to - all together, class:
Billions and billions of dollars.