Ask the IRA Expert: Can My IRA Receive a Loan or Financing?

By John Bowens0 Comments

Question:

I’ve just opened my self-directed IRA and am very interested in real estate. There is one property in particular I would like to purchase and flip. I do not, however, have enough liquid cash in my IRA to make the purchase outright.
 
So my question is: can my IRA receive a loan or financing the way I would outside of my IRA?

Tom S.

Answer:
 
Thank you for your question, Tom. This is a common question because naturally when we think about purchasing property, we think about mortgages and therefore the possibility of loans. However, because the purchase is being made by your IRA, which is ultimately a form of trust, there are certain rules that apply. Nothing in your IRA can be used as collateral and therefore a regular bank loan is not possible. One potential option is to procure a non-recourse loan. This type of loan is essentially what it sounds like: a loan where nothing else in the IRA is used as collateral. This generally entails greater risk for the lender and therefore you can typically expect a different structure.
 
If your IRA received a non-recourse loan for the purpose of purchasing an asset, there is also the possibility of triggering something called UBIT, which stands for Unrelated Business Income Tax. The IRS intends for your IRA to be a retirement account, rather than a flow-through business or entity, which it may be viewed as, if you utilize non-recourse loans. That being said, incurring UBIT doesn’t mean you’ve broken any rules—far from it! You may have found a funding method that works best for you, and that’s the key with self-direction: becoming educated and finding out what works best for you. As always, I advise you to speak with your CPA or financial professional before making investment decisions.
 
Thanks again for your question and good luck with your investments!

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