November 18, 2013

Using Leverage To Purchase Real Estate

Diana Hoff
4 min

Over time, real estate investments have afforded many people the powerful combination of appreciation and income.  

The purchase of real estate through a self-directed IRA is a popular choice for this and other reasons. Concerned you don’t have enough funds in your IRA for the entire purchase? If your self-directed IRA doesn’t have enough money to pay for the entire purchase on its own, you may be able to finance or leverage the purchase of the income producing property.

Keep in mind, if you don’t have enough money in your retirement account to purchase the real estate, the IRS forbids you from extending credit to your own IRA account. So, what are your options?

Real estate investment accounts can use borrowed money as long as the account holder’s credit history, income, or assets are not used to guarantee loan repayment to the creditor. In other words, there can be no personal guarantee given by you as the account holder and consequently, there can be no personal recourse against you since the property and the loan are held within the retirement plan.  The loan your IRA would need to acquire is normally known as a non-recourse loan.

Be aware that loans for property inside of IRAs may require the payment of Unrelated Business Income Tax (UBIT).  It is the IRA holder’s responsibility to have the tax form (990T) prepared by a tax advisor and have the IRA administrator submit the appropriate forms for the property owned by the IRA.

The staff at Mountain West IRA can maintain the appropriate records for your self-directed IRA real estate investment. Our goal is to assist you with your alternative asset purchases while paying little or no taxes. Contact Mountain West IRA for additional information.

3 Benefits of Leveraging Your Self-Directed IRA:

  1. Tax considerations—one of the great benefits of an IRA is tax-deferral. As an investor, you’re able to put more money into investing than you would with a taxable account. When your investment generates income that exceeds expenses, you will be subject to the UBIT. However, the taxes you pay when computing UBIT can be significantly lower than traditional income taxes.
  2. Benefit from growth—leverage allows an investor to purchase a larger, more valuable asset and profit from its growth, with only a smaller out-of-pocket expense.
  3. Diversification—instead of investing your entire self-directed IRA balance on one property, you can split the balance among several properties as a down payment and use leverage to finance the rest. By diversifying your investment portfolio, you generate revenue on several properties and minimize your financial risk.

Using a non-recourse loan in conjunction with your Mountain West self-directed IRA is a powerful tool to build your wealth. However, it’s one that needs to be carefully managed.

For over six years, Mountain West IRA has been showing individuals and small businesses how to take advantage of self-directed retirement plans as one of the nation’s leading independent self-directed IRA and 401(k) administration companies. With a knowledgeable staff and our clients’ best interests in mind, we offer the outstanding customer service that only an independently owned and operated administrator can. If you’re ready to start your own self-directed IRA, contact Mountain West IRA today.

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