Leveraging Real Estate in an IRA
A self-directed IRA real estate
may acquire a loan to purchase property, but it must be a non-recourse loan (the lender is acknowledging, in the case of default, their only avenue for renumeration is the property itself.)
Not all lending institutions and banks offer these types of loans, but several do exist. Also, a non-recourse loan can come from a private lender.
When an IRA purchases real estate using a non-recourse loan, the debt financed portion of the property's net profits may be subject to UBIT.
Similarly, if an IRA-owned property is sold while a percentage of ownership is still debt financed, the net profits derived from the debt financed percentage may be subject to UBIT.
UBIT is paid by the real estate IRA and does not affect the IRA holder's personal taxes. Learn more about UBIT here.
After you have used your self-directed IRA
to purchase real estate, the IRA holder makes the management decisions. That may include the hiring of a property manager (or other non-disqualified person or entity) to handle the day-to-day cash flow and operations, or you may choose to work directly with New Direction to have vendors and other bills paid. You are allowed to make decisions for your IRA-held asset, but there are limitations that the IRS imposes.
- Income generated by the self-directed IRA real estate must go back into the IRA. Rent checks are made out to the IRA (or the management company if there is one), not the IRA holder.
- You cannot pay for any property related expenses with your personal funds on behalf of the real estate IRA. All expenses are paid from the IRA.
- As the IRA holder, you have the ability to choose tenants, plumbers, repairmen, etc. for your IRA-owned property.
- Maintenance and improvements cannot be performed by the self-directed IRA real estate holder or any disqualified person.