Non-Recourse Lending for an IRA: Webinar Recap

This recorded webinar explains how to use non-recourse lending to buy real estate in an IRA. Using a non-recourse loan enables you to invest without exhausting your retirement savings, keeping capital in the account to invest in other assets. This tactic is also common for people who have limited funds in their IRA.

The speakers give a detailed overview on the concept of non-recourse lending and the tax implications in your IRA for using this strategy. They also provide tips on successful loans and precautions of leveraging real estate in an IRA.

The full webinar answers the following questions:

  • What is a self-directed IRA?
  • What is a non-recourse loan?
  • How does non-recourse lending work for a SDIRA?
  • What is the process?
  • How does an IRA earn unrelated debt-financed income?
  • Why is unrelated business income tax (UBIT) owed on the debt-financed loan portion?

We invite you to take about 45 minutes and listen to the recorded webinar. Or, if pressed for time, have a glance at the primary takeaways below.

Webinar hosts: Corey Daharsh and Alex Perny, business development specialists at Advanta IRA

Self-directed IRAs provide a new source of capital for real estate investments.

A self-directed IRA (SDIRA) allows individuals to invest in alternative assets to grow retirement funds. Real estate is a favored alternative investment in IRAs, offering the opportunity to earn income at a faster and more secure pace than offerings on the stock market. SDIRAs present a new source of capital for investors already involved in real estate. And for some, financing is becoming a necessary tool due to the current real estate market. Costs are high, and taking advantage of non-recourse lending lessens the amount of retirement funds needed from your IRA to purchase real estate.

Non-Recourse Lending to Finance Real Estate Purchases in an IRA

The speakers emphasized that a non-recourse loan is vital when using an IRA to invest in real estate and the investment involves borrowing. The retirement Notebook on top of papers on a desk next to a pen indicating research on non-recourse lending.account itself is not an individual and, therefore, not able to sign any personal loan guarantee. Non-recourse lending is required in any capacity for the retirement account to appear on the deed of title to reflect a percentage of ownership/investment. A non-recourse loan is made in the name of the IRA—you are not personally responsible for this note. And the only recourse the lending institution has if the loan defaults is the collateral used to back the loan. Collateral is typically the real estate purchased with the loan.

UDFI Tax Implications for Debt-Financed Real Estate Investments

Investors must be aware of the tax implications when an IRA earns unrelated debt-financed income (UDFI). When you use non-recourse lending for real estate investments in a self-directed IRA, income attributable to the debt-financed portion of the asset is called UDFI. UDFI is subject to unrelated business income tax (UBIT). But it only applies to the percentage of income earned by the debt-financed portion of the loan. This tax applies to profits gains attributable to debt an IRA has invested in. UBIT does not apply to investment income such as rent, real estate rentals, note interest, dividends, royalties, and capital gain income.

The hosts explained that it might seem counter-intuitive to expose a tax-sheltered IRA to taxes. But despite the potential tax implications, using debt leverage can still result in significant returns to the IRA, especially with correct tax planning and write-offs.

A Solo 401(k) May be a Better Option When Using Non-Recourse Lending

IRAs and 401(k)s are treated differently—401(k)s (including solo 401(k)s) are exempt from UDFI on leveraged income. This makes it a more favorable option for investors who use non-recourse lending. So, for small business owners or the self-employed who want to invest in real estate in a retirement plan—a solo-k is worth considering. Consult with a tax advisor or CPA to determine if eligibility to use this retirement plan.

If you have questions about this article or want to learn more about non-recourse lending, SDIRAs, and solo 401(k)s, contact Advanta IRA.

Additional resources:

Case Study: How to Invest with a Self-Directed IRA Non-Recourse Loan

The Self-Directed Solo 401(k) for Small Business Owners