QUESTION: According to an investment newsletter, If your prime or
second residence has a first mortgage through a bank, your
self-directed IRA is allowed to buy the mortgage from the bank as an
investment - because it is clearly a commercial transaction at market
value. Could you let me know if I have the story right? (S.H.)
REPLY: Most IRA custodians and tax professionals would disagree.
Based on some limited research, I was not able to confirm that an IRA
can invest in a mortgage on a residence of the IRA beneficiary. The
material I was able to find at the links below suggest the opposite.
In the absence of any kind of IRS ruling or other authoritative source
for this position, I'd have to disagree with whoever told you that
such investments are permitted.
However, investing in real estate or in real estate mortgages is not
prohibited unless the investment involves a disqualified person such
as the beneficiary of the IRA.
Here are four sources I was able to find within a short time. The
first link is to an IRS document that is a collection of frequently
asked questions about IRA investments. The fourth link seems to be a
good article about permissible IRA investments in real estate.