Article by NuView President, Glen Mather:
We’re often asked during our seminars and continuing education classes on self-directed IRAs whether investors can use their IRA to make a down-payment on investment property, and the short answer is yes. But there are two rules to be aware of when leveraging IRAs:
First, the IRA must purchase the entire property, not just provide the down-payment. The property is titled in the name of the IRA (NuViewIRA, FBO (client’s name) IRA). The mortgage then would also be issued in the name of the IRA.
Second, the loan must be non-recourse, which means that in the case of non-payment the lender is limited to only taking the asset secured in the loan that is owned by the IRA. The IRS actually prohibits a disqualified party of your IRA, which includes yourself, to provide credit to your IRA (IRS Section 4975).
There are considerable benefits to leveraging IRAs. It certainly could provide a way for the IRA holder to purchase higher-valued property than the balance their IRA account may allow. While partnering can provide additional funds, leveraging IRAs allows you to retain all of the net gains rather than just a partnered portion. It may also permit several properties to be purchased instead of just one, increasing diversification inside the IRA.
So, is it even possible to get a non-recourse loan? The best source may actually be the seller of the property, although that would normally require that the property has sufficient equity in order for the seller to offer such terms to your IRA. There also are several banks that have created a special loan program for IRAs that clients often find attractive.
Lenders to IRAs normally require not only an appraisal, but also an assessment as to the likely cash flow of the property, including rental history and projections. After all, the lender to an IRA cannot assume that the IRA holder can or will make future contributions to his account. At NuView IRA, we can set up automated payments to the lender, ensuring that available funds are transferred according to the agreed-to terms of the loan.
Before you get started with leveraging IRAs, be sure to seek guidance about potential taxes your IRA could incur, Unrelated Debt Financed Income, which takes effect when an IRA makes a profit of more than $1000 per year from the leveraged portion of the rental property. Also, state laws may differ on the exact protection for the borrower of the loan.
Our transaction experts at NuView to answer any questions on the process of leveraging IRAs, and, as always, tax professionals and advisors can help with specific investment details you wish to make within your IRA.
