Did You Know that IRA Investments in Real Estate can be leveraged?

Yes, not only is it possible to acquire investment Real Estate with your IRA but it is possible to finance a purchase! Leveraging Real Estate is a tremendous wealth building tool. Though today lower LTVs are both the norm and of preference, a little leverage dramatically opens up the investments available & yields possible.

Leveraging IRA Investments in Real Estate

Non-recourse Is Required

Loans on IRA owned property must be non-recourse. A non-recourse loan is one in which the IRA account holder or any other disqualified party is not personally liable for repayment of the loan. The security instruments allow no recourse against the individual account holders or the balances of your IRA funds. In the event of default or foreclosure the lender can only recover the financed property and the equity in it.

What are the Requirements for Rental Property?

Keep in mind the loan is not being issued to the account holder, it is the IRA’s loan and it cannot be attributable to the account holder in any way. Typically, the loan is no more than 70% loan to value. The financed property must generate sufficient net operating income to exceed debt service payments by 20-25% for Single Family Homes, plexes and small apartment buildings.

To apply for a loan the following is a common list of the items required:

  1. Completed loan application.
  2. Most recent asset statement verifying IRA assets for purchase and reserves.
  3. Purchase/sales contract.
  4. Acceptable Real Estate appraisal for the property to be financed.
  5. A copy of the IRA account holder’s driver’s license.
  6. Documentation from the IRA custodian/administrator needed for closing. If the investor is using a Checkbook IRA, the LLC’s Articles of Organization, Operating Agreement and Federal tax ID number.
  7. Homeowner’s insurance should read the IRA or it’s LLC as the insured.

Unrelated Business Income Tax (UBIT)

If income is derived from non-IRA activity or IRA property is leveraged, then any appreciation or revenues attributed to the other activity or leverage is considered “unrelated” and a tax applies. The tax exposure on the appreciation can be eliminated or deferred by paying the loan off at least one-year preceding a sale or using a 1031 Exchange at time of sale. Solo 401(k) accounts are not subject to leverage derived UBIT.

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