I purchased a rental property with my self-directed IRA (all cash) in 2013 using an LLC set up for me by an attorney. I recently discovered I can borrow against the property to get cash for down payments on more rental properties. I use Wells Fargo for all my accounts, including the IRA LLC. Today WFB told me they won't let the LLC borrow against a rental property unless its commercial, which mine is not. They will only lend to me personally but not to the LLC which I'm pretty sure will be a problem due to the IRA rules. Is this a typical rule for all banks or just WFB? If it is a standard rule, how does one get lending for an LLC attached to an IRA. Any info would be much appreciated.
investment property can be financed inside of an IRA, however since you are considered to be a disqualified person are not allowed to provide personal guarantee for the loan - therefore the loan must be non-recourse. Wells Fargo as well as most other banks and conventional lenders do not offer such loan. There is only handful of banks/lenders doing loans like that. Over the years we have build a relationship with several lenders who offer non-recourse financing to IRAs and 401(K)s, just sent me a PM and I will get you the list of those lenders.
The reason is because big banks will only lend to companies commercially. It would have to be a commercial loan since its your llc looking to borrow money. If you personally are looking to borrow then they could offer you conventional loan products. This has been what I have found to be normal practice in my personal experience.
I hear local community banks are able to be a bit more flexible when it comes lending practices but I can not guarantee it would much different.
There are two banks that will lend on a non-recourse basis to IRA's in all 50 states.
First Western Federal Savings in South Dakota
North American Savings Bank in Missouri
When you use debt financing with your IRA, the gains from the financed investment are taxable to the IRA as Unrelated Debt Financed Income (UDFI). The tax bite is typically not that significant on rental income, but you will certainly want to educate yourself on this topic and be sure your CPA can assist you with the record keeping and filings.
See following link to lean about the prohibited transaction rules.