I'm considering purchasing a property in Ohio using my self-directed IRA for the downpayment. However, I'm being told by the account custodian that loans on a self-directed must be Non-Recourse loans. Since Ohio is a deficiency judgment state, I don't believe lenders would be willing to waive the right to obtain judgments against the borrower in the event a foreclosure sale doesn't cover the full amount owed. Does anyone have any suggestions on how to get around this? Would appreciate the feedback.
You need to work with a specialty lender that does non-recourse loans. Most conventional lenders do not offer such loans.
Leading national providers include:
First Western Federal Savings in SD
North American Savings Bank in MO
Solera National Bank in CO
Titan Bank in TX
When an IRA uses mortgage financing, it will create taxable income in the form of Unrelated Debt Financed Income (UDFI). The income that the IRA received that is attributed to the non-IRA (borrowed) money is taxed. The tax typically does not add up to much and will be less than the amount of boost in return that leverage produces. You will want to be sure to speak with your licensed tax advisor (which your IRA custodian is not) and educate yourself on the concept before you move forward.
As Brian mentioned, your self-directed IRA would need to obtain a non-recourse loan if you want to finance an investment. Because of the nature of these loans, your IRA will typically need to provide at least 30%-40% of the purchase price as a down payment.
There are lenders willing to make a non-recourse loan to the IRA. They consider these to be riskier loans. They generally want to 40-50% down payments and the interest rates are above market to compensate.
Thank you all for the feedback. There's a lot to consider here. I'm checking in with our accountant and looking into lenders willing to provide a non-recourse. It occured to me though (and I'll be asking this as well), if I personally guarantee the loan outside of the IRA, or does that breach the personal-benefit requirements for self-directeds. Ideally, I'd love to finance this purchase with personal funds but I don't have enough for the downpayment outside of the IRA. This is all super fun though, figuring out the nuances to this game. :) I'll provide an update after it's all said and done as I think this is a great learning exercise for the BP community.
Yes, if you personally guarantee a loan that is made to your IRA or Solo 401k, that would be a prohibited transaction. The PT rules do not allow for any extension of credit between you and your retirement account. This is why a non-recourse loan is required when your IRA or 401k borrows money.