5 Things to Know About Buying an IRA Rental Property With Mortgage Financing
Owning income-producing real estate in your self-directed IRA is a great way to diversify and build wealth.
Real estate is a solid asset with value cycles that are largely decoupled from the stock market and the daily news cycle. A well-selected rental can produce consistent cash flow as well as the potential for appreciation over time.
When you add the power of leverage to your IRA property investment, the potential rewards are significant.
By using borrowed capital, the IRA can extend its purchasing power and create a higher cash-on-cash return for each dollar deployed.
Buying a property with your self-directed IRA using a mortgage does involve some special consideration and planning.
As part of our ongoing How-To Series, we wanted to touch on some of the key factors that go along with such a strategy.
From having a plan in place to purchasing the property, here’s what you need to know about buying an IRA rental property using mortgage financing.
1. Have Your Plan in Place First
As with any real estate investment made using a self-directed IRA, the first step is to have your plan in place before you write an offer.
The IRA must be the purchaser, and all funds for earnest money must come from the IRA. You cannot use personal funds to lock up a contract for your IRA.
It typically takes 3-4 weeks to establish and fund a self-directed IRA.
Most lenders that work with IRA properties will take about 45 days to process and fund a loan, which makes it even more critical to have the IRA in place before writing an offer.
2. Non-Recourse Loans are Required
IRS rules require that any debt-instrument utilized by an IRA be non-recourse – meaning no personal guarantee from you or any disqualified person to the IRA.
If you were to pledge a guarantee, then you would be providing your personal assets as security for the IRA’s debt. This would violate the self-dealing rules that surround IRA plans.
There are a handful of banks that offer such non-recourse loans to IRA borrowers on 1-4 unit properties.
If you are working on a larger commercial property such as an apartment or office complex, there are a wider range of banks willing to lend on a non-recourse basis.
It is also possible to obtain seller-financing or a private loan from another investor – so long as you avoid disqualified persons to the IRA.
Make sure you discuss your project in advance with a specialty non-recourse lender such as those listed on our Vendor Resources page. They can tell you if the property you’re considering will qualify and what type of down payment and reserve requirements may apply.
Because a non-recourse loan without a personal guarantee is higher risk to the bank, the terms you can expect will be more conservative. Typical residential non-recourse loans will offer 60-65% loan to value and require 10-15% liquid reserves in the IRA.
3. Purchasing the Property
Once you have your plan in place and preliminary approval by your lender, you are ready to make an offer on a suitable property for your IRA.
The IRA-owned LLC or trust will be the purchaser of the property, and the contract should be written to reflect this.
You will execute the contract on behalf of the entity — not in your own name.
Any earnest money deposit must be paid with IRA funds. The same is true for any other pre-closing costs such as inspections and appraisals.
Give yourself at least a 45-day close period to allow for lender underwriting and processing.
The IRA-owned LLC or trust will be the borrower on the mortgage.
The lender will need to be an additional named insured on your plan’s insurance policy.
At the closing, you will execute all contracts for the real estate purchase and the non-recourse mortgage. You can then issue funds from your IRA’s bank account to fund the purchase.
4. Tax Considerations
When an IRA uses debt-financing to make an investment, there is a small tax burden that applies.
The income directly attributed to IRA capital — the down payment — is fully tax sheltered.
The portion of the income that the IRA receives from the non-IRA (borrowed) money is what is taxable.
The leveraged income is referred to as Unrelated Debt-Financed Income (UDFI), and that is what is being taxed.
Don’t panic!
Many investors act like a spider landed on them when they hear there may be a tax liability inside their IRA.
While the income generated by UDFI does come with some tax cost and an additional administrative burden, the IRA will still benefit from the higher cash-on-cash returns that leverage can produce.
A Solo 401(k) plan is exempted from UDFI taxation when the debt instrument is associated with the acquisition of real property.
For those investors who qualify, the Solo 401(k) can be a better option if your investment strategy will include mortgaged property investments.
5. Running the Numbers
Following is a simple example to compare a leveraged property investment with an all-cash purchase by the IRA.
Assume you have $100,000 of IRA money to invest. Your IRA can purchase a $100,000 property all-cash or use that same $100,000 to make a down payment on a $200,000 property.
The leveraged investment produced an additional $78,823 of income over a 5-year period as compared to the all-cash property.
The cost of UDFI taxation and tax preparation totaled $4,732. To put that in perspective, would you spend $4,700 to make an extra $78,800?
The ability to hold debt-financed real estate in an IRA creates real potential to magnify the growth of your retirement savings.
This strategy is not without risk, however. Your IRA will need to be prepared to pay the mortgage every month, whether there is a tenant in the property or not.
The need to file a tax return for the IRA’s Unrelated Debt-Financed Income introduces an additional bookkeeping burden and the necessity to bring a skilled CPA onto your team.
When weighing the potential increase in the rate of return, however, the reward may justify the extra complexity such an investment strategy creates.
What our clients says about us
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.
