Using Leverage: Non-Recourse Mortgages
A self directed IRA or Solo 401(k) opens the door to a powerful wealth building strategy – the use of leverage. When purchasing an investment property, your plan can choose to obtain a mortgage rather than pay all cash. The use of borrowed money in this fashion allows you to gain a higher dollar-for-dollar return on your retirement plan’s investment. This is a key investing principle known as leverage.
While an IRA may use leverage in certain conventional asset environments, it is quite unusual to be able to do so. Real estate as an asset class is better suited to the use of debt-financing, so the strategy is more widely used. The results can be quite favorable.
Debt Must be Non-Recourse
IRS rules prohibit any provision of benefit from you or a disqualified party to the plan. This precludes you from placing a personal guarantee on any debt instrument such as a mortgage. As such, an IRA or 401k must obtain a non-recourse mortgage. In this type of loan, you are not utilizing your credit to qualify and are not pledging your personal assets as security for the loan in the event of default. Rather, the plan is the borrower and the property can be the only security for the loan. Essentially, the property is qualifying for the loan.
This type of non-recourse loan is not widely available in the marketplace, but there are a handful of institutions that offer such loans on a nationwide basis. There are also some local or regional banks and private investment groups that will lend to IRA and 401k borrowers on a non-recourse basis.
The leading national lenders are:
You may also choose to borrow from a private party, obtain seller financing, or enter into lease-purchase or contract-for-deed transactions.
Lending Guidelines
This type of loan is higher risk to the lender, and their underwriting policies are going to me more conservative as a result. Typical guidelines you might find are as follows:
- Down payment of at least 30%. Condos as high as 50%
- 10% – 15% cash reserves in the plan at the time of the loan
- 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 5.5% – 7.5% is common, depending on the loan terms.
- Clean, cash flow properties work well. Options are limited for properties requiring extensive repairs or raw land.
Such loans typically take 4-6 weeks to process, so you will want to have your self directed plan in place and work closely with a lender before entering into a contract to purchase property.
Tax Implications for IRA Borrowers
When an IRA (or other tax exempt entity) utilizes debt financing to acquire property, a trust tax on what is referred to as Unrelated Debt Financed Income (UDFI) comes into play.
The general principal is that the tax exempt entity’s investment is fully sheltered from taxation, but the portion of the income generated through the use of borrowed, non-exempt funds is taxable.
In most cases, the financial impact of the tax is limited. A $100,000 rental property that is 50% debt financed and produces 10% returns would incur a tax bill of less than $200 for the year, for example.
If you do intend to use mortgage financing in an IRA, you will want to work with your tax professional to evaluate the impact both in terms of tax cost as well as the administrative costs of record keeping and tax filings.
Do you have a real estate investment in mind? Use our calculator to compare the expected return on investment for an all cash real estate purchase versus a leveraged purchase through a non-recourse loan.
The Solo 401(k) Exemption to UDFI for Real Estate Investments
UDFI taxation applies to IRA’s on all forms of debit-financing. A Solo 401(k) is subject to UDFI in general, but specifically exempted when the debt-financing is used for the acquisition of real property.
In Summary
While leveraging an IRA investment does create the administrative overhead and expense of the UDFI filing, the bottom line to your IRA can still be very favorable. Through leveraging, you will typically increase the cash-on-cash return relative to your IRA’s capital participation in the transaction. While you forfeit some of this increased return through taxation, your IRA still gets to keep the large majority of this leveraged income.
Resources:
UDFI Calculator All Cash Purchase vs Leveraged Property Purchase in an IRA
IRS Publication 598 Tax on Unrelated Business Income of Exempt Organizations
Internal Revenue Code section 514 Unrelated Debt-Financed Income
IRS forms 990-T: 990-T Instructions & 990-T Form
A WORD OF CAUTION: Do not wait until you have found a property to purchase before setting up a Self Directed IRA plan. You will be greatly disappointed to discover that you’re likely to lose the property due to timing.
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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.
