Retirement savers who have discovered self-directed IRAs are often most enthusiastic about the prospect of using their accounts to purchase real estate. Custodians such as Quest Trust Company have helped countless investors broaden their retirement savings horizons to assets beyond just stocks and mutual funds.
Unfortunately, some self-directed IRA account holders wrongly assume that they need an account balance large enough to purchase investment property outright, paying the full amount in cash. In truth, it’s possible to use mortgage financing to purchase investment real estate within your self-directed IRA. Here are some of the basics for getting mortgages to purchase property with your retirement account.
Try Your Local Banks
Your first step should be to visit your local bank or credit union – preferably one that you already do business with – to inquire whether they provide mortgages within the individual retirement account structure. Not all financial institutions are willing to do so. As with providing custodial services for self-directed IRAs, it’s not an issue of legality, as mortgage financing is perfectly acceptable within a retirement account. It’s simply that some institutions choose not to engage in transactions that don’t generate a high enough volume of business for them.
You May Need a Specialist
Like custodial services for an IRA, you may need to find a financial institution that specializes in this type of mortgage. There are many institutions that provide just this kind of service, and a quick Internet search should net you a number of different options. Be sure to inquire about not only their prevailing mortgage rates, but their experience in the industry as well as the other terms that will apply to the mortgage.
Non-Recourse Loans Only
Be aware that in order to borrow money to purchase real estate with your self-directed IRA, the loan must be “non-recourse.” This means that if there is ever a default on the loan, the lender can only look to the underlying property in order to satisfy the debt, and cannot seek to recover from you personally. This limitation, coupled with the specialized nature of the loan, means that you’ll generally pay higher interest rates for this type of loan than you would to borrow for your primary residence.
Unrelated Business Taxable Income
Another important issue to consider before getting a mortgage to purchase real estate with your self-directed IRA is that your account will be responsible for the consequences of so-called Unrelated Business Taxable Income or “UBTI.” Borrowing money is one of the prohibited activities for an individual retirement account, so any gains that you realize from the investment which are attributable to your mortgage will trigger an immediate tax liability for your account. You’ll need to take this liability into account when determining whether a particular real estate investment is appropriate, and how much you wish to borrow, and it’s essential that you understand the UBTI rules and plan accordingly.
Borrowing money to purchase real estate with your retirement account can greatly expand the investment possibilities you have available to you. Just be sure that you understand all of the benefits and consequences so that you can make the right decision for your account.
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