Using Debt in IRA Real Estate Investing

An often overlooked option available to many self-directed retirement account investors is to use debt in IRA real estate investing. One reason is a retirement account loan must be a non-recourse loan. This means the only recourse the lender has is the investment property itself as collateral. The borrower cannot be held personally liable in the event of default. NDTCO has nearly two decades of experience with alternative asset administration such as real estate including non-recourse loans.

Ready to buy real estate with your IRA, 401(k), or HSA? Click here to open a new self-directed account in a matter of minutes!

When or how can you use debt in IRA real estate investing?

New investment property purchase: Your IRA can borrow against a new property purchase. Lenders often require anywhere from 20-50% of the purchase price up front and they’ll lend the rest. Of course, every lender’s terms will vary and depend on the subject property.

Cash-out refinances: Already own real estate free and clear in your IRA? You can still get a non-recourse loan secured by that real estate and infuse your IRA with additional cash that can be utilized for more investments!

Will taking a non-recourse loan affect my return on investment because of unrelated business income tax (UBIT)?

It’s true that if your IRA finances a property, the earnings from the debt-leveraged portion of that property may incur UBIT. However, that doesn’t mean it will cause a negative return on investment. In general, if your investment property has a healthy positive cash flow, UBIT will not be a deal killer. Additionally, if the non-recourse loan is paid off 12 months before your IRA sells the property, the sale proceeds will not be subject to capital gains taxes.

Click here for more information on UBIT.

Like most tools, debt can be powerful and requires an understanding of how to use it before putting it to work. Since NDTCO cannot provide tax, legal, or investment advice, we recommend consulting a qualified tax or legal professional who is familiar with non-recourse loans.

Please give us a call at 877-742-1270 or send us a message through the Client Portal if you have questions.

Related Articles