Can my IRA invest cash, and can I get a loan to buy real estate with my IRA?

Your IRA can buy real estate using its own cash and a loan or mortgage to acquire the property. Whenever you leverage your IRA with debt, however, you must be aware of two important rules.

First, the loan your IRA obtains must be a non-recourse loan. A non-recourse loan is made by the lender against the asset being purchased. In the event of default, the sole remedy for the lender is to foreclose and take back the asset. The lender cannot pursue the IRA or the IRA owner for any deficiency. IRS regulations require this structure to protect the tax-advantaged status of your IRA.

Second, your IRA may be subject to a tax known as Unrelated Debt-Financed Income (UDFI), which is part of the Unrelated Business Income Tax (UBIT) rules. UDFI applies to the portion of the investment that was financed with debt. For example, if 50% of the property purchase was funded with a non-recourse loan, then 50% of the net income (e.g., rental income or gains from sale) may be taxable under UDFI rules.

Additional Considerations:

• UDFI Exemption for Solo 401(k)s: If you’re self-employed and using a Solo 401(k) instead of an IRA, the UDFI tax on debt-leveraged real estate does not apply due to an exemption under IRC §514(c)(9). This can make the Solo 401(k) more favorable for leveraged real estate investing compared to an IRA.
  

• Loan Terms Must Be IRA-Compliant: All loan terms—including down payment, interest rate, and repayment schedule—must be negotiated on a non-recourse basis and must not involve the IRA owner or other disqualified persons as guarantors.
  

• No Personal Guarantees or Cross-Collateralization: You, as the IRA owner, may not personally guarantee the loan, nor may other assets (including your personal assets or other retirement accounts) be used as collateral.

• UDFI Reporting: If your IRA property is subject to UDFI, your IRA must file IRS Form 990-T annually and pay any tax due from the IRA’s cash balance. Directed IRA clients can work with a CPA familiar with self-directed tax rules to ensure proper filing.