How IRA real estate financing can work
An IRA can buy investment real estate with cash or combine IRA funds with third-party financing. The key issue is who is responsible for the debt. Because an IRA owner is a disqualified person, the financing should not rely on your personal guarantee, personal credit, or personal assets. In practice, financing for IRA-owned real estate is commonly structured as a non-recourse loan, meaning the lender looks to the IRA-owned property and other permitted loan collateral rather than to you personally.
The IRA custodian or trustee must permit the real estate investment and be able to process the purchase and financing documents. The loan and closing documents should reflect IRA ownership in the manner required by the custodian and lender. If your question is whether you can personally borrow money from your IRA, see our separate IRA loan FAQ. That is a different issue from an IRA using financing to acquire an investment.
Why leverage can create UDFI and UBIT
Using debt can change the tax treatment of income inside an IRA. Under Internal Revenue Code Section 514, property held to produce income can be treated as debt-financed property when acquisition indebtedness is connected to the property. The debt-financed portion of income can create unrelated debt-financed income (UDFI). UDFI is included in unrelated business taxable income (UBTI), which can cause the IRA itself to owe unrelated business income tax (UBIT).
For example, assume an IRA buys a $400,000 rental property using $200,000 of IRA cash and a $200,000 non-recourse loan. It would be too simplistic to assume that exactly 50% of the property’s income will always be taxable. The Section 514 calculation uses factors such as average acquisition indebtedness, average adjusted basis, net income, and allowable deductions, so the taxable percentage can change as the debt and basis change.
If an IRA has $1,000 or more of gross unrelated trade or business income, a Form 990-T filing is generally required. Roth IRAs are also listed among the IRA accounts subject to these unrelated business income rules, so using a Roth IRA does not automatically eliminate UBIT on debt-financed income.
What should you avoid when using an IRA loan?
- Do not personally guarantee the loan or pledge personal assets to support it.
- Do not borrow money from the IRA yourself or use IRA assets as security for a personal loan.
- Avoid paying IRA property expenses from personal funds or directing property income to yourself.
- Review any financing involving family members, related entities, or other disqualified persons before proceeding.
- Do not close until the custodian, lender, and tax professional agree on the transaction structure and required documents.
For broader rules on self-directed retirement real estate, browse the IRA FAQ library.
What should you review before closing?
Before using an IRA non-recourse loan, review the loan’s recourse provisions, required down payment, interest rate, reserves, property cash flow, and the amount of IRA liquidity available for ongoing expenses. Ask a tax professional to estimate potential UDFI and UBIT under the actual debt structure rather than relying only on the initial loan-to-value ratio.
If you are comparing direct IRA-owned real estate with a passive real estate structure, you can also review how a self-directed IRA may invest in a DST. The financing, tax, securities, liquidity, and suitability considerations are different, so each structure should be evaluated on its own terms.