Can You Live in Your IRA Owned House?

This is a great article and I thought I would pass on.

You CANNOT buy a piece of property with your IRA and live in it. However, lets figure out a way that this can be done legally.

By: Keith Stunek

IRA Insights

The Internal Revenue Code Section of 4975 is very clear. You CANNOT buy a piece of property with your IRA and live in it. However, let's figure out a way that this can be done legally.

Some background. We know that if you take a distribution from your Traditional IRA, you will pay tax and if you are under age 59 ½, pay an additional 10% penalty tax. The IRS has exceptions to the 10% penalty tax for instances of death, disability, educational expenses and so on. One of the exceptions to the 10% penalty is purchase of your first time home. However this is only available up to $10,000. Another exception to the penalty, but not to taxation, is receiving a Series of Equal Periodic Payments, commonly called 72(t) payments.

Taking 72(t) payments must be structured using the IRS's Safe Harbor Found IRS Notice 89-25. This requires that:

1. Payments must be made at least annually.
2. A series of distributions begun before age 59½ must continue unchanged for five years or until the IRA holder reaches age 59½, whichever is later. Note that this five-year rule is waived upon death or disability.
3. Payments must be scheduled over the single life expectancy of the IRA holder or over the joint life expectancy of the IRA holder and his or her designated beneficiary.
4. The method of calculation is based upon the Required Minimum Distribution Rules, amortizing the payments or annuitizing the payments.

So your question at this point in time is, "What does 72(t) payments have to do with buying a house?" Good question. Let's say for example a 50 year old person has $1,000,000 in a rollover IRA. This person would like to buy a $600,000 condo in Florida. So the person goes to the bank to get a mortgage. The monthly mortgage payment will be $2,802.96. The question is, "How do I pay for this mortgage when I am already paying a mortgage on my primary home?"

By doing 72(t) payments from the IRA using the amortization method, this person can receive payments in the amount of the mortgage payments. Thereby, when distributions from the IRA occur, the distributions are used to pay the mortgage.

So what have you done? You have purchased a home for your retirement and you own the home outside your IRA. Your IRA distributions are taxable, there is no 10% penalty and you can live there, rent it out, fix it up and hold for future use or sale.