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Query: Can an IRA invest in a mortgage on the beneficiary's residence

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  • Vernon K. Jacobs
    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
    Message 1 of 1 , Jan 3, 2007
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      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.

      http://www.irs.gov/retirement/article/0,,id=163722,00.html
      http://www.trustetc.com/investment/prohibited-ira-transactions.html
      http://www.trustetc.com/forms/p590.pdf (Page 41)
      http://www.pensco.com/education/RealEstateOverview.asp

      Vern Jacobs
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