self-directed IRA loans

Member since 2023 · 11 posts · 1 vote

Hello everyone, I'm curious if anyone has insights on where to find loans of this nature. I recently completed reading a book on flipping and attended the author's webinar yesterday. During the webinar, the author mentioned a specific type of loan that offers tax benefits or potentially exempts taxes when used for flipping purposes. While my explanation might not be entirely accurate, I'd greatly appreciate it if anyone could share information on this topic.

Thanks!

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Ned CareyPro Member

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Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes

@Limor Hanannia You need reread the book or watch the web and get clearer on what he or she was talking about.

They could have been talking about lending money or borrowing money. There is no tax on borrowing money, your IRA can borrow money but there IS a tax for that. Your IRA can loan money to others ( but not yourself) and there is no tax on the interest.

While you have gotten some good answers here, you have to be more specific about what you are asking.

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Chris SeveneyBusiness Member
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
2y
@Limor Hanannia
It is a non recourse loan and you can Google it for lenders who provide them. Note that if you fix and flip in your self directed ira (not advised) and you have a loan you are not skipping out on paying taxes
Not a cpa or advisor but I have been advised you will pay taxes on the portion or percentage of the amount loaned. So if you put $50k in, borrowed $100k then 2/3 of every dollar made is outside your sdira and subject to tax through UDFI.
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Jeff ChisumPro Member
Lender · All 50 States · Member since 2020 · 248 posts · 142 votes
2y
NASB out of Kansas City is who I used
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Pete M.
Financial Advisor · Issaquah, WA · Member since 2017 · 241 posts · 141 votes
2y
@Limor Hanannia Are you asking to learn more about SD-IRAs in general, or what's your specific question? Are you looking to use your own funds, or someone else's? Note that SD-IRAs do not offer a loan option, only SD-401ks.

SD-IRAs & SD-401ks are two ways of being able to put qualified retirement funds towards real estate investments. SD-IRAs are subject to UDFI (and you must use a non-recourse loan); SD-401ks are not subject to UDFI. @Chris Seveney gave a good quick overcap of what that is.

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Brett SynickyPro Member
Solo 401k and SDIRA Consultant · Orange, CA · Member since 2013 · 873 posts · 497 votes
2y
Quote from @Limor Hanannia:

Hello everyone, I'm curious if anyone has insights on where to find loans of this nature. I recently completed reading a book on flipping and attended the author's webinar yesterday. During the webinar, the author mentioned a specific type of loan that offers tax benefits or potentially exempts taxes when used for flipping purposes. While my explanation might not be entirely accurate, I'd greatly appreciate it if anyone could share information on this topic.

Thanks!

To clarify what @Pete M. meant about loan option with the solo vs. the SDIRA he's referencing the participant loan. You as the plan fiduciary can borrow up to 50k or 50% whichever is less and use it for virtually any purpose including what would normally be a prohibited transaction. Both SDIRA and Solo 401k can use leverage on Real Estate. Both must use non-recourse loans only (property is the only security) and only the Solo will avoid the UDFI which kicks off UBIT on the income from the financed portion of the real estate.

Also bear in mind @Limor Hanannia that if the IRS thinks you're running a business within your SDIRA or Solo 401k you will be taxed on UBIT for that as well which scales up to 37% so it can be quite hefty. Flipping is a business and is not a passive activity even if you delegate all the physical work which you have to do no matter way on either option. If you normally buy and hold and flip one or two per year cause that exit strategy makes more sense you'll probably be ok but if you're primarily flipping and doing multiple that will be deemed as running a business. Hope this helps
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Ned CareyPro Member
Moderator
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
2y
@Limor Hanannia You need reread the book or watch the web and get clearer on what he or she was talking about.

They could have been talking about lending money or borrowing money. There is no tax on borrowing money, your IRA can borrow money but there IS a tax for that. Your IRA can loan money to others ( but not yourself) and there is no tax on the interest.

While you have gotten some good answers here, you have to be more specific about what you are asking.
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Limor Hanannia
OP
Member since 2023 · 11 posts · 1 vote
2y
I realized. I want to take a loan from someone who has it. I will look into that more. Thanks!
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Limor Hanannia
OP
Member since 2023 · 11 posts · 1 vote
2y
Quote from @Ned Carey:

@Limor Hanannia You need reread the book or watch the web and get clearer on what he or she was talking about.

They could have been talking about lending money or borrowing money. There is no tax on borrowing money, your IRA can borrow money but there IS a tax for that. Your IRA can loan money to others ( but not yourself) and there is no tax on the interest.

While you have gotten some good answers here, you have to be more specific about what you are asking.

I want to take a loan from someone who has it. I will look into that more. Thanks
0 Reply
Limor Hanannia
OP
Member since 2023 · 11 posts · 1 vote
2y
Quote from @Pete M.:

@Limor Hanannia Are you asking to learn more about SD-IRAs in general, or what's your specific question? Are you looking to use your own funds, or someone else's? Note that SD-IRAs do not offer a loan option, only SD-401ks.

SD-IRAs & SD-401ks are two ways of being able to put qualified retirement funds towards real estate investments. SD-IRAs are subject to UDFI (and you must use a non-recourse loan); SD-401ks are not subject to UDFI. @Chris Seveney gave a good quick overcap of what that is.

Someone else's funds.

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Limor Hanannia
OP
Member since 2023 · 11 posts · 1 vote
2y
Quote from @Brett Synicky:

Quote from @Limor Hanannia:

Hello everyone, I'm curious if anyone has insights on where to find loans of this nature. I recently completed reading a book on flipping and attended the author's webinar yesterday. During the webinar, the author mentioned a specific type of loan that offers tax benefits or potentially exempts taxes when used for flipping purposes. While my explanation might not be entirely accurate, I'd greatly appreciate it if anyone could share information on this topic.

Thanks!

To clarify what @Pete M. meant about loan option with the solo vs. the SDIRA he's referencing the participant loan. You as the plan fiduciary can borrow up to 50k or 50% whichever is less and use it for virtually any purpose including what would normally be a prohibited transaction. Both SDIRA and Solo 401k can use leverage on Real Estate. Both must use non-recourse loans only (property is the only security) and only the Solo will avoid the UDFI which kicks off UBIT on the income from the financed portion of the real estate.

Also bear in mind @Limor Hanannia that if the IRS thinks you're running a business within your SDIRA or Solo 401k you will be taxed on UBIT for that as well which scales up to 37% so it can be quite hefty. Flipping is a business and is not a passive activity even if you delegate all the physical work which you have to do no matter way on either option. If you normally buy and hold and flip one or two per year cause that exit strategy makes more sense you'll probably be ok but if you're primarily flipping and doing multiple that will be deemed as running a business. Hope this helps
Thanks for the explanation!
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Ned CareyPro Member
Moderator
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
2y
@Limor Hanannia The money you borrow from someone else is not taxable to you. Presuming the loan is for business any interest you pay is a tax deduction.

Now the person who loans you the money has to pay taxes on the interest they collect from you. However if they loan you the money from their IRA they don't pay taxes on that interest until they take it out when they retire. This may be what the person you heard from was talking about.
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Pete M.
Financial Advisor · Issaquah, WA · Member since 2017 · 241 posts · 141 votes
2y
Quote from @Ned Carey:

However if they loan you the money from their IRA they don't pay taxes on that interest until they take it out when they retire.
Unless that person's earnings in this arrangement are subject to UBIT or UDFI. Then the SDIRA would be required to pay taxes for that filing year.
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Ned CareyPro Member
Moderator
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
2y
@Pete M. Is there a scenario where interest earned would be subject to UBIT?
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Pete M.
Financial Advisor · Issaquah, WA · Member since 2017 · 241 posts · 141 votes
2y
Quote from @Ned Carey:

@Pete M. Is there a scenario where interest earned would be subject to UBIT?

Just re-read your post, I had missed the part about it being a loan from the owner of the self-directed account and not an equity position! That shouldn't be subject to UBIT then.
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