5 Strategies for Refinancing an IRA Rental Property
Leverage is a powerful way to increase the income performance of investments. Many self-directed plan investors know this and use non-recourse mortgages to acquire income property.
Not as many people are aware of the possibilities surrounding refinancing property in an IRA.
Let’s take a look at several of the ways you can boost the performance of your Checkbook IRA or Solo 401(k) with refinancing strategies.
Non-Recourse Mortgages are Required
Any debt instrument an IRA uses must be non-recourse in nature. That means you as the IRA account holder or any other disqualified person to your IRA cannot pledge a personal guarantee. To do so would be providing a benefit to the IRA and would result in a prohibited transaction.
- Solera National Bank - www.solerabank.com
While there may be a local or regional bank you can work with that offers non-recourse loans, be sure they understand the IRS rules associated with IRA debt.
It is also possible to obtain a non-recourse loan from a private party, so long as they are not a disqualified person to your IRA.
Current Economics Create Opportunity for Refinancing
Two factors are combining to make this a great time to research refinancing opportunities.
Interest rates are currently low. While non-recourse debt always costs a touch more due to the higher level of risk for the lender, we are seeing rates that are better than they have been in years past. Interest rates are ranging from the high 4% range on 3/1 ARM loans to the mid 6% range on a longer term fixed-rate loan.
Property values have increased dramatically in the last few years in all kinds of markets across the country. For investors who have held a property several years, that means an increase in equity value that can be tapped with smart financing strategies.
1- Refinance an Existing Mortgage
Simply reducing the cost of an existing loan can improve the performance of your IRA’s investment property. If the interest rate reduction produces savings that exceeds the cost of refinancing, then your IRA wins.
If you have held a property for some time and paid down significant principal, that might allow you to move to a shorter-term loan that will have a lower overall cost while still retaining positive cash flow.
2 – Pull Cash from an Existing IRA Property
Property values have been rising dramatically for the last several years. If your plan has owned a property for some time, it is likely worth a good bit more than the original purchase price.
Whether you paid all cash originally or have a mortgage on a property, there is probably equity available to be tapped into.
By refinancing an existing loan or simply putting a favorable and low-rate mortgage on an existing wholly owned property, you can free up some of that equity for other investments.
Of course, any such equity belongs to the plan and not to you personally. If you pull cash from an IRA property, that cash has to be reinvested by the IRA. You can use that additional capital to purchase another property, invest in a private equity fund, lend to other investors, or whatever you think will produce the best returns.
So long as the income you can produce with a new investment is higher than the borrowing cost, you will be improving the overall performance of your IRA or 401(k) plan.
3 – Buy All Cash, Then Add a Mortgage
One of the challenges for many investors and home buyers in the last 18 months or so has been a very competitive bidding market for properties.
Stronger offers win, and an all-cash offer is sometimes needed to get a property under contract. For plan investors with accumulated retirement savings, this can be a competitive advantage.
Just because you acquire a property with a cash purchase, however, does not mean you need to leave all that cash tied up in a single property.
After you have closed, you can then work with a non-recourse lender to obtain financing. The end result is not very different from purchasing a property with a loan to begin with, but you put your plan in a more competitive bidding position.
4 – Rehab, Then Add a Mortgage
Because the property is the only security for the loan, most non-recourse lenders are conservative with their underwriting. If a property needs significant repairs before it can be put into service as a rental, such as more than about $10,000 of work, they might not be willing to lend.
In this type of scenario, you can purchase a property all cash with your IRA then refinance once it has a renter in place. Alternately, you can use a private loan or hard money to get the property purchased and fixed up, then refinance into a less expensive longer term non-recourse loan.
This approach is very common with investors using the buy, rehab, rent, refinance, repeat strategy of investing (BRRRR).
5 – Consolidate IRA Mortgage Debt
If you have multiple properties in your self-directed IRA or Solo 401(k), you may be able to tune things up a bit with a portfolio loan. Some non-recourse lenders will provide a loan that is collateralized by several properties. This can simplify the lending relationship and reduce some cost overhead.
If you have a mix of properties with or without financing in place, or with a mix of different loans, such a consolidation may be able to reduce your overall financing costs or free up capital for additional investments.
Keep Your CPA in the Loop
When an IRA utilizes borrowed capital, it creates taxable Unrelated Debt-Financed Income (UDFI). The portion of income the IRA receives that is attributed to the borrowed money is taxable. Because deductions like interest payments and depreciation apply, the net tax cost is not generally significant. Leverage boosts return. The tax on UDFI dents but does not negate that boost.
Any time you have exposure to UDFI, it is important to consult with your licensed tax counsel in advance so you can prepare appropriately. This is especially true in the case of refinance transactions, which can change the tax profile of an existing investment or introduce taxation to a deal that was not initially taxable.
For investors who qualify for a Solo 401(k) plan, life is a lot simpler. A Solo 401(k) is exempted from UDFI on debt associated with the acquisition of real property.
In Summary
This kind of topic is exactly why we just love self-directed IRA plans. Leverage is one of the most powerful investing tools around. In a conventional IRA allocated into stocks and funds, you simply cannot take advantage of this great tool. Once you take full control of your retirement savings in a self-directed IRA or Solo 401(k), you can start playing the game like an expert, and take full advantage of advanced concepts like leverage.
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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.
