Downpayment loan deduction?

[ksoth]

What is the name of your state (only U.S. law)? California

Hello,

I purchased a new house. For part of the down payment, I borrowed money from my 403b retirement account. Can interest paid in towards this loan be deducted from my taxes, similar to mortgage interest?

 

[davew128]

Absolutely not.

 

[tranquility]

To expand on the above answer a bit, is the loan secured by your house? (In that there is a recorded mortgage/deed of trust?)

 

[davew128]

To expand on the above answer a bit, is the loan secured by your house? (In that there is a recorded mortgage/deed of trust?)

Doesn't change the answer if it is. Remember who the beneficial owner of the 403(b) is.

 

[tranquility]

Doesn't change the answer if it is. Remember who the beneficial owner of the 403(b) is.

Where would I find that being the reason for denial of the deduction rather than the one I stated? Under the regs and the code it seems it might be deductible.

Info edit:
Don't get me wrong, I don't think even if the loan was secured by the house it would be deductible, but, why?

Is it because it is not "interest" perhaps? Or, not "indebtedness"?

 

[davew128]

Where would I find that being the reason for denial of the deduction rather than the one I stated? Under the regs and the code it seems it might be deductible.

Info edit:
Don't get me wrong, I don't think even if the loan was secured by the house it would be deductible, but, why?

Is it because it is not "interest" perhaps? Or, not "indebtedness"?

Because the lender of the loan is also the borrower. I'd also point out that using the 403(b) to have a lien on the loan for the property being resided in would be a prohibited transaction and disqualify the plan.

 

[tranquility]

Because the lender of the loan is also the borrower. I'd also point out that using the 403(b) to have a lien on the loan for the property being resided in would be a prohibited transaction and disqualify the plan.

No. They are not the same. I'm not sure it would be a prohibited transaction either. From the IRS audit manual:

4.72.11.2 (09-22-2014)
Identifying Prohibited Transactions

A prohibited transaction means any direct or indirect transaction described in IRC 4975(c)(1) between the plan and a disqualified person.

If a prohibited transaction falls within one of the statutory exemptions under IRC 4975(d), the excise tax may not apply. In addition, there are two types of administrative exemptions that may be granted under IRC 4975(c)(2):

Individual exemptions

Class exemptions

IRC 4975(f)(6) provides that the statutory exemptions under IRC 4975(d) (other than IRC 4975(d)(9) and (12)) do not apply to certain types of transactions involving owner-employees (as defined in IRC 401(c)(3)) and persons or entities deemed to be owner-employees.

4.72.11.2.1 (09-22-2014)
Disqualified Person

The term "disqualified person," as defined in IRC 4975(e)(2), covers a range of people including employers, unions and their officials, fiduciaries and persons providing services to a plan such as lawyers and accountants. Also included are persons whose relationship to the plan may not be immediately apparent and who will require more diligent investigation to detect. This includes:

A service provider.

The employer or employee organization involved.

Persons who have a 50 percent or more interest. See IRC 4975(e)(2)(E) and (G).

A member of the family as defined in IRC 4975(e)(6) of any individual described in IRC 4975(e)(2)(A), (B), (C) or (E).

Individuals with a 10 percent or more interest. See IRC 4975(e)(2)(H) and (I).

The sale, exchange or leasing of property (directly or indirectly) between a disqualified person and the plan constitutes a prohibited transaction whether the transaction was made from the disqualified person to the plan or from the plan to the disqualified person. If a disqualified person transfers real or personal property to a plan, that transfer constitutes a sale or exchange such as to make the transfer a prohibited transaction if:

The real or personal property transferred by a disqualified person to a plan is subject to a mortgage or lien which the plan assumes.

The plan takes the property subject to a mortgage or similar lien which was placed on the property by a disqualified person within 10 years prior to the transfer. Such a transfer of real or personal property will most often arise in the context of a contribution of property other than cash by the employer. See IRC 4975(f)(3).

The term “fiduciary” is specifically defined in IRC 4975(e)(3) and includes persons not previously covered under traditional trust law. The term fiduciary includes any person who:

Exercises any discretionary authority or control in managing the plan.

Exercises any authority or control over the trust’s assets.

Renders investment advicse concerning plan assets for which he/she receives direct or indirect compensation.

Has any discretionary authority or responsibility for plan administration.

With the code's (4975) specific exemptions EVEN IF he were a disqualified person:

(d) Exemptions
Except as provided in subsection (f)(6), the prohibitions provided in subsection (c) shall not apply to—
(1) any loan made by the plan to a disqualified person who is a participant or beneficiary of the plan if such loan—
(A) is available to all such participants or beneficiaries on a reasonably equivalent basis,
(B) is not made available to highly compensated employees (within the meaning of section 414 (q)) in an amount greater than the amount made available to other employees,
(C) is made in accordance with specific provisions regarding such loans set forth in the plan,
(D) bears a reasonable rate of interest, and
(E) is adequately secured;
(2) any contract, or reasonable arrangement, made with a disqualified person for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor;
(3) any loan to an [1] leveraged employee stock ownership plan (as defined in subsection (e)(7)), if—
(A) such loan is primarily for the benefit of participants and beneficiaries of the plan, and
(B) such loan is at a reasonable rate of interest, and any collateral which is given to a disqualified person by the plan consists only of qualifying employer securities (as defined in subsection (e)(8));
(4) the investment of all or part of a plan’s assets in deposits which bear a reasonable interest rate in a bank or similar financial institution supervised by the United States or a State, if such bank or other institution is a fiduciary of such plan and if—
(A) the plan covers only employees of such bank or other institution and employees of affiliates of such bank or other institution, or
(B) such investment is expressly authorized by a provision of the plan or by a fiduciary (other than such bank or institution or affiliates thereof) who is expressly empowered by the plan to so instruct the trustee with respect to such investment;
(5) any contract for life insurance, health insurance, or annuities with one or more insurers which are qualified to do business in a State if the plan pays no more than adequate consideration, and if each such insurer or insurers is—
(A) the employer maintaining the plan, or
(B) a disqualified person which is wholly owned (directly or indirectly) by the employer establishing the plan, or by any person which is a disqualified person with respect to the plan, but only if the total premiums and annuity considerations written by such insurers for life insurance, health insurance, or annuities for all plans (and their employers) with respect to which such insurers are disqualified persons (not including premiums or annuity considerations written by the employer maintaining the plan) do not exceed 5 percent of the total premiums and annuity considerations written for all lines of insurance in that year by such insurers (not including premiums or annuity considerations written by the employer maintaining the plan);
(Plus many more that takes me over 10k characters.)

 

[tranquility]

I think the real key to the question will be if the loan is from the salary deferral account or if it is from an employer contribution account where the OP is not a "key employee".

 

[davew128]

I think the real key to the question will be if the loan is from the salary deferral account or if it is from an employer contribution account where the OP is not a "key employee".

Speaking hypothetically, yes. In the real world, I can't imagine the plan administrator doing anything other than dispersing the maximum allowed ($50k) with an amortization schedule over 5 years and informing payroll of the deduction it needs to start making. Getting security on the loan in the form of a lien? Fuhgeddaboutit.

 

[tranquility]

Speaking hypothetically, yes. In the real world, I can't imagine the plan administrator doing anything other than dispersing the maximum allowed ($50k) with an amortization schedule over 5 years and informing payroll of the deduction it needs to start making. Getting security on the loan in the form of a lien? Fuhgeddaboutit.

So, you agree the problem with the plan is what I stated at first?

 

[davew128]

So, you agree the problem with the plan is what I stated at first?

Yes, there won't be a lien. The plan if it allows a loan wouldn't require a lien, so there won't be one. There's no reason for a lien. If the loan isn't repaid, its a taxable distribution.