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July 25, 2017

So you’ve decided to combine the advantages of investing in real estate with the tax benefits of a self-directed IRA, but your plan doesn’t have the capital to purchase a property outright. Perhaps your IRA has a decent supply of available funds but lacks the purchasing power to acquire the investment you really have your eye on. Under these circumstances, the prospect of obtaining a loan to cover the difference would likely enter your mind. Incurring additional debt may deter individuals from pursuing new investments, but a savvy strategy and the right opportunity can prove lucrative even if your self-directed retirement plan can’t achieve full equity right away.

As with a personal investment, your IRA or 401(k) may purchase real estate using debt leverage, which is an interesting concept.  You can’t leverage your IRA or 401(k) to purchase more stocks or mutual funds. Below are a few considerations for investors interested in broadening their retirement portfolios with leveraged real estate assets:

  • Find a non-recourse loan. Like any loan, non-recourse financing is available in a variety of terms and rates. The key distinction lies in the collateral structure; your personal cash or assets may never be used to guarantee repayment. The IRA-owned property itself would be the collateral in this model. A higher level of due diligence may be required in locating a non-recourse lender with desirable terms. However, the added effort may prove fruitful in the long run as you experience the tax advantages of self-directed IRA investing.  Regional banks sometimes offer non-recourse loans, and private or peer-to-peer lending endeavors have created new avenues for acquiring financing as well.
  • Keep the money separate. Just as a lender cannot pursue your personal funds for settlement of a non-recourse loan, you’re equally unable to make payments out of your own pocket. The same is true of other expenses inherent to your IRA-owned property (appliance repairs, or maintenance). The IRA is responsible for these costs, just as all rental income must be paid to the plan and may never be personally retained.
  • Unrelated business income tax (UBIT). Even though IRAs and 401(k)s provide tax benefits, UBIT may be assessed on income yielded from the financed portion of the property. Taxes will only apply to profits in accordance with the debt ratio. For instance, if your IRA-owned property is 50% financed and earned $100,000 in a given tax year, your IRA would owe taxes on $50,000 at the current trust rate. Several additional factors may contribute to UBIT calculations, so assistance from a tax professional or CPA is generally recommended.

Self-directed IRA providers like New Direction IRA are making it easier than ever to incorporate real estate into individual retirement plans. IRA companies are developing libraries of educational materials and technological platforms that allow 24/7 account management, online bill pay, and easy transaction initiation. Some even provide a list of local non-recourse lenders, though New Direction IRA cannot recommend or endorse any such individuals or entities. Please don’t hesitate to contact our office if you’re ready to get started.

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