10 Things to Know About Non-Recourse Loans
When investing in rental property the use of debt-financing can be a valuable tool. An investor who borrows money can multiply the purchasing power of their capital to acquire more properties or properties of higher quality. So long as the income received is greater than the cost of debt, this use of leverage can boost the cash-on-cash returns for each dollar invested.
For investors with a self-directed IRA or Solo 401(k) the ability to finance investments in this fashion can be a real game changer. While it is possible to use leverage in conventional financial investments such as options or margin trading, there is considerable risk in taking on debt obligations with volatile assets. Many IRA and 401(k) plans do not even provide the option to make leveraged investments.
Since real estate is more stable in value, it is better suited to the use of financing. Bringing this tool into your retirement savings strategy can help you accelerate the growth of your nest egg.
There are some special considerations that apply when using debt-financing inside of a self-directed retirement plan.
1 – IRS Rules Require Non-Recourse Loans
Because IRS rules prohibit any direct or indirect benefit between a plan and a disqualified person, all debt instruments used in an IRA or 401(k) must be non-recourse. That simply means there is no personal guarantee from you as the plan account participant or any disqualified person to the plan.
For you to pledge your assets as security for the plan’s debt would produce a prohibited transaction with severe tax consequences. This is specifically outlined in Internal Revenue Code section 4975,(c)(1)(B) which states that a prohibited transaction occurs if there is any direct or indirect “lending of money or other extension of credit between a plan and a disqualified person”.
2 – Bank That Offer Non-Recourse Loans
Most banks do not offer non-recourse loans for 1 to 4-unit residential property. Non-recourse lending is more common in larger commercial real estate projects, and more banks tend to offer non-recourse loans for apartment, office, retail, and industrial properties.
Following is a banks that actively loan nationwide to retirement plans for residential properties on a non-recourse basis.
Solera National Bankwww.solerabank.com
There are a handful of local or regional lenders that will offer non-recourse loans, but they are not generally as knowledgeable about dealing with retirement plans and may not be competitive on rates or terms. If you have a good relationship with a local lender, certainly ask, but it is not usually worth an extensive local search to identify a lender.
3 – Other Types of Lenders
The bank lenders above take a conservative approach to underwriting and may not be willing to lend in certain situations they deem too risky.
There are some private debt funds and hard money lenders that will lend more aggressively on projects such as new construction or properties needing significant rehab. Expect to pay a higher interest rate for these types of loans.
It is also possible to utilize seller financing or create your own sources of private lenders. Just be sure to avoid disqualified persons.
The only IRS requirement is that the note not have a personal guarantee. Any legitimate lending vehicle without such a guarantee is acceptable.
4 – Typical Lending Terms
Terms change depending on the economic climate, so be sure to reach out to a few lenders and learn about current lending arrangements. Common lending guidelines include:
- Down payment of at least 30%. Condos as high as 50%
- 10% – 15% cash reserves in the plan
- Terms range from 5/1 ARMS to 25-year fixed-rate loans
- Rates will generally be 1% – 1.5% higher than a typical investor loan with a personal guarantee. A range of 5.25% – 7.5% is common, depending on the loan terms.
5 – Properties that Can be Financed
Because the property is the only security for the loan, non-recourse lenders look for low risk deals. Banks like clean, tenant-ready properties in stable neighborhoods.
A variety of property types can be financed, including 1 to 4-unit residential, larger multi-family residential, commercial properties, and even income producing farms in some cases.
The bank lenders will not usually finance fix and flip transactions, properties built before 1940, raw land, or new construction. Some lenders will not finance restaurants, motels or similar properties where the income is tied to a services business rather than the rental of the property itself.
For projects the banks will not touch, you may need to look to private real estate debt funds or private lenders.
6 – Re-Finance Loans are an Option
It is possible to apply financing to a property already held by your IRA or 401(k) plan.
Many investors like to start out simple and pay all cash for a property. This minimizes both risk and complexity. Once a property is performing well inside their retirement plan, they may choose to take on debt-financing. The resulting cash liquidity can then be used by the IRA or 401(k) to acquire another property and accelerate portfolio growth.
Another case where using a refinance strategy makes sense is for new construction or rehab properties. A non-recourse lender may not be willing to loan the capital for the early-stage project. Once the property is completed and rent-ready, or after it has a history of rental income, a bank may be willing to lend. The initial phase can be financed all cash by the IRA or 401(k), or the plan can use more expensive hard money capital on a short-term basis to get the property stabilized before re-financing.
Be sure to discuss any such strategy with a non-recourse lender before starting. You want to be confident of the ability to obtain a loan and know the requirements for refinancing.
7 – Portfolio Loans
Because banks that offer non-recourse loans are generally lending their own money, they have flexibility to do some kinds of deals you might not seen in a normal environment where a bank originates a loan that is then sold off to investors.
Most lenders will not provide financing for low cost properties. Unless they are lending about $50K, it just is not profitable to them. However, if your IRA acquires 3 inexpensive properties all cash, a lender might bundle those properties as collateral for a single loan you can use to acquire more.
We have also seen an investor pledge equity in several mid-range residential properties to obtain a non-recourse loan on a small apartment complex purchase with his IRA.
8 – Be Aware of Tax Implications
When an IRA utilizes mortgage financing to acquire property, taxable Unrelated Debt Financed Income (UDFI) is generated.
The portion of the income generated through the use of borrowed, non-IRA funds is taxable.
The impact of the tax is often minimal. A $100,000 rental property that is 50% debt financed and produces 10% returns would incur an annual tax bill of less than $200, for example. The IRA is still very much receiving the benefit of leveraged returns, with just a small bit of friction in the form of taxation.
Be sure to consult with your licensed tax professional to understand the administrative and tax filing requirements as well as the potential tax-cost you can expect.
A Solo 401(k) is exempted from tax on UDFI when the debt is used for the acquisition of real property.
9 – Appropriate Expectations are Necessary
A lot of investors try to compare the performance of using non-recourse debt for an IRA property with investments they might make outside of their retirement plan. This can lead to disappointment. When you can place a personal guarantee on a loan, the lender will give you more favorable borrowing terms including lower down payment requirements and lower interest rates. It is just not an apples-to-apples comparison.
The better approach is to look at a leveraged rental property investment in your IRA as compared to making that same investment on an all cash basis. Alternately, you can compare a financed rental investment to what your IRA or 401(k) could produce when limited to investing in publicly traded financial products. When viewed in this way, the benefits of leverage become clear.
10 – Leverage can be Powerful
Wisely used debt can help you grow your tax-sheltered retirement savings more aggressively than investing on an all cash basis.
The strategy is not without risk, as your IRA or 401(k) will need to pay the costs of borrowing whether there is cash flow from the property or not. Because of the tax implications of UDFI, extra complexity in terms of bookkeeping and tax filings will apply for IRA investors.
For investors who are able to scale the equity value of their IRA real estate portfolio faster, or generate higher cash-on-cash return for a particular project, the rewards are well worth it.
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Quick answers to common questions
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
YES! In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS CodeSec. 401 IRC 408(a) (3)
It’s actually pretty simple. Early on, regulators let the securities industry take the lead in educating the public about retirement accounts. Naturally, brokers and banks promoted stocks, bonds, and mutual funds—giving the impression that those were the only allowed investments. That was never true... and still isn’t. You can probably guess why they kept the rest under wraps.
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Keogh
- 401(k)
- 403(b)
- Profit Sharing Plans
- Qualified Annuities
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll youraccount into a new Self-Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full-time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type.
A self-directed retirement plan is a type of IRA or 401(k) that gives you greater control over how your retirement funds are invested. Unlike traditional accounts held at banks or brokerage firms that limit you to stocks, bonds, and mutual funds, self-directed plans allow you to invest in a wide range of alternative assets including real estate, private businesses, precious metals, cryptocurrency, and more.
These plans still follow the same IRS rules and maintain the same tax-deferred or tax-free benefits as conventional retirement accounts. The difference is simply in how and where you choose to invest.
No. Moving to a self-directed IRA or Solo 401(k) does not trigger any taxes, as long as your funds are eligible for rollover.
Self-directed retirement plans maintain the same tax-advantaged status as traditional plans offered by banks or brokerage firms. The key difference is flexibility—our plans are designed to give you greater control and allow for a wider range of alternative investments beyond stocks, bonds, and mutual funds.
A prohibited transaction is any action between your retirement plan and a disqualified person that violates IRS rules and can lead to serious tax consequences. Under IRS Code 4975(c)(1), prohibited transactions include:
- Selling or leasing property between your plan and a disqualified person Example: Your IRA cannot purchase a property you already own.
- Lending money or extending credit between the plan and a disqualified person Example: You cannot personally guarantee a loan your IRA uses to buy real estate.
- Providing goods or services between your plan and a disqualified person Example: You can’t use your personal furniture to furnish a rental property owned by your IRA.
- Using plan income or assets for the benefit of a disqualified person Example: Your IRA cannot buy a vacation home that you or your family use.
- Self-dealing by a fiduciary (using plan assets for their own benefit) Example: Your CPA shouldn't loan your IRA money if they’re advising the plan.
- Receiving personal benefit from a deal involving your IRA's assets Example: You can’t pay yourself from profits your IRA earns on a rental.
If a transaction doesn’t clearly fall within the allowed guidelines, the IRS or Department of Labor may review the situation to determine if it qualifies as a prohibited transaction.
Disqualified persons are individuals or entities that are prohibited from engaging in certain transactions with your IRA or 401(k). Doing so could trigger a prohibited transaction, which may result in taxes and penalties.
Here’s who is considered a disqualified person:
- You (the account holder)
- Your spouse
- Your parents, grandparents, and other ancestors
- Your children, grandchildren, and their spouses
- Any advisor or fiduciary to the plan
- Any business or entity owned 50% or more by you or another disqualified person, or where you have decision-making authority
These rules exist to prevent self-dealing and ensure your retirement plan remains in compliance with IRS regulations.
(Reference: IRC 4975)
Understanding and following these rules can be tricky, but it’s very doable. The best way to stay compliant is to work with professionals who specialize in self-directed retirement plans. They can help you navigate IRS guidelines and avoid prohibited transactions.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
Yes. While self-directed retirement plans allow for a wide range of investments, there are a few important restrictions.
You cannot invest in collectibles or life insurance contracts, and you must avoid prohibited transactions—activities that benefit you personally rather than the retirement plan. These include things like buying or selling property to yourself or family members, using plan assets for personal gain, or self-dealing in any way.
Violating these rules could cause your entire IRA to lose its tax-advantaged status. To protect your account, it’s essential to work with professionals who understand IRS regulations and can help you stay compliant.
This is a common misconception. In many cases, professionals may simply be unfamiliar with self-directed retirement plans, as they fall outside their usual scope of work. CPAs and tax preparers are trained to file taxes, not necessarily to advise on alternative retirement strategies. Financial advisors and brokers often work for firms that focus on traditional investments like stocks and mutual funds—and may not benefit from or support alternative options like real estate or private lending.
Self-directed retirement investing is legal under IRS rules—but like any specialized area, it requires working with professionals who understand how it works.
The IRS has rules in place to make sure your IRA is used only for the exclusive benefit of the retirement account—not for personal gain or to help family members. These rules can get complicated because there are many ways a conflict of interest can occur, even unintentionally.
For example, if your IRA buys a house and rents it to your mother, you might be reluctant to evict her if she stops paying rent. That emotional connection creates a conflict between what’s best for your IRA and your personal relationships, something the IRS aims to prevent.
These rules help ensure your retirement account stays compliant and protected. (See IRC 408)
Yes. Most tax-deferred retirement accounts—such as Traditional IRAs, old 401(k)s, 403(b)s, and TSPs—can be rolled over into a self-directed IRA or Solo 401(k), depending on your eligibility. Roth IRAs cannot be rolled into these accounts.
You can contribute directly from earned income, subject to annual IRS contribution limits. The method and amount depend on the type of plan you have (e.g., Solo 401(k) vs. IRA).
To take a distribution, you'll request funds through your custodian or plan administrator. Distributions may be taxable depending on your account type and age. Early withdrawals may be subject to penalties.
For 2025, the Solo 401(k) max contribution limit is $81,250 if age 60-63, $77,500 if age 50-59 or 69+, and $70,000 if under 50. Traditional and Roth IRAs have a limit of $7,000 ($8,000 if age 50+). Limits are subject to IRS adjustments.
Yes. IRA contributions are typically due by your personal tax filing deadline (e.g., April 15). Solo 401(k) contributions follow your business tax filing deadline, including extensions.
IRS reporting requirements vary depending on the type of self-directed retirement plan you have. Here’s a quick breakdown of what you need to know
Please note: Our team can help you understand what’s required for your specific account, but we don’t provide tax or legal advice. We always recommend working with a qualified tax professional to ensure full IRS compliance.
Self-Directed IRA (Traditional or Roth)
- Form 5498 – Filed by your custodian each year to report contributions, rollovers, and the fair market value (FMV) of your account.
- Form 1099-R – Issued if you take a distribution or move funds out of your IRA.
- Annual Valuation – You'll need to provide updated FMV for any alternative assets held in the account, such as real estate or private placements.
Solo 401(k)
- Form 5500-EZ – Required if your plan assets exceed $250,000 as of year-end. Must be filed annually by the plan participant.
- Form 1099-R – Required if you take a distribution or roll funds out of the plan.
- Contribution Tracking – Keep records of employee and employer contributions. These are not filed with the IRS but may be needed for tax reporting or audits.
SEP IRA
- Form 5498 – Filed by your custodian to report contributions and FMV.
- Form 1099-R – Filed by your custodian. Issued for any distributions.
- Employer Contributions – Must be reported on your business tax return (and on employee W-2s, if applicable).
Health Savings Account (HSA)
- Form 5498-SA – Filed by your HSA custodian to report contributions.
- Form 1099-SA – Filed by your HAS custodian. Issued for any distributions.
- Form 8889 – Must be included with your personal tax return to report contributions, distributions, and how funds were used.
