At 1031 Exchange Place, we understand the importance of exploring various investment opportunities, including the use of an IRA to invest in real estate. Yes, you can use leverage or financing when investing in real estate with your IRA, but there are specific rules and restrictions you must follow to ensure compliance with the Internal Revenue Service (IRS).
To use leverage or financing within your IRA, you must use a non-recourse loan. A non-recourse loan is a type of loan where the lender has no claim against the borrower beyond the collateral, which in this case would be the real estate property. This means that if you default on the loan, the lender can only recover their losses through the sale of the property and cannot pursue you personally for any outstanding balance.
However, there are a few important considerations when using leverage or financing with your IRA:
- Unrelated Business Income Tax (UBIT): When your IRA earns income from debt-financed property, it may be subject to UBIT. This tax is calculated based on the percentage of the property’s income that is attributable to the financed portion. Consult with a tax professional to understand your potential UBIT liability.
- Prohibited Transactions: Ensure that all transactions comply with IRS rules to avoid prohibited transactions, which could lead to tax penalties and potential disqualification of your IRA.
- Working with a Self-Directed IRA Custodian: To invest in real estate using your IRA, you must have a self-directed IRA custodian that allows for such investments. This type of custodian can hold and manage your real estate investment, ensuring that all transactions are completed in compliance with IRS regulations.
In conclusion, it is possible to use leverage or financing when investing in real estate with your IRA, provided that you follow the necessary rules and regulations. At 1031 Exchange Place, we recommend consulting with a tax professional and a self-directed IRA custodian to navigate the complexities of this investment strategy and ensure compliance with IRS guidelines.