What Is IRA Property Lending?

An IRA property loan is a mortgage placed on real estate that's held inside a self-directed IRA or solo 401(k). The loan is made to the IRA (or the IRA's LLC), not to you personally. The property serves as collateral.

Here's the basic structure:

• The borrower is your IRA (or your IRA's LLC), not you
• The collateral is the free-and-clear property inside the IRA
• The loan proceeds go into the IRA, where they can be used for IRA-permissible purposes
• Monthly payments come from IRA funds (rental income or other IRA assets)
• The loan must be non-recourse, meaning if your IRA defaults, the lender can only take the property, not your personal assets or other IRA holdings

The non-recourse requirement is the key. It's what makes these loans different from a regular mortgage, and it's why most banks won't make them.

Self-directed IRAs let you invest in real estate, private notes, precious metals, and other alternative assets. Millions of Americans hold real property inside their IRAs.

But here's the problem: once a property is inside your IRA, your options for accessing its equity are limited. You can't take out a traditional home equity loan because the property isn't in your name. It belongs to the IRA. You can't personally guarantee a loan on it because that would be a prohibited transaction under IRS rules.

The only type of financing allowed is a non-recourse loan, where the lender's sole remedy in a default is the property itself. No personal guarantee. No recourse to your other assets.

This creates a gap. The property might be worth $400,000, free and clear, with strong rental income. But most banks and mortgage companies won't touch it because they can't get a personal guarantee.

IRA property lenders fill that gap. We provide non-recourse loans specifically designed for properties held in self-directed IRAs and solo 401(k)s.

The typical IRA property borrower is someone who:

• Bought a single-family rental property in their SDIRA years ago
• The property is now free and clear (no existing mortgage)
• The property has appreciated significantly
• They want liquidity without selling the asset
• They're usually 50 or older, often approaching or in retirement

These are experienced investors. They understood the tax advantages of holding real estate in a retirement account. Now they want the same flexibility that property owners outside of IRAs have: the ability to borrow against equity they've built.

Common reasons for seeking an IRA property loan:

• Diversifying IRA holdings without triggering a taxable distribution
• Funding a new investment opportunity within the IRA
• Covering unexpected expenses from IRA funds
• Accessing equity while the property continues to appreciate

IRA property loans are structured differently from conventional mortgages. Because the lender has no personal guarantee and limited recourse, the terms reflect that added risk:

• Loan-to-value (LTV): Typically 50% or lower. If your property is worth $400,000, the maximum loan is generally around $200,000.
• Interest rate: Higher than conventional mortgages, typically in the 9-12% range, reflecting the non-recourse risk.
• Origination fees: Usually 2-3 points (2-3% of the loan amount).
• Term: 3-5 year balloon with 25-30 year amortization. Monthly payments are based on the longer amortization, with the remaining balance due at balloon maturity.
• Reserve requirement: Your IRA typically needs to hold 6-12 months of loan payments in liquid assets as a safety buffer.
• Property types: Single-family homes are the standard. Some lenders work with small multifamily, but SFH is the most common.

These terms may look expensive compared to a conventional 30-year mortgage. But consider the alternative: selling the property, losing future appreciation, and potentially triggering a taxable distribution from your IRA. The cost of the loan is the cost of keeping the asset.

Here's where it gets important. When an IRA takes on debt to finance an investment, the IRS may require the IRA to pay tax on a portion of the income generated by that debt-financed property. This is called Unrelated Debt-Financed Income (UDFI), which falls under the broader category of Unrelated Business Income Tax (UBIT).

The basic idea: if your IRA borrows money to hold an asset, the portion of income attributable to the borrowed funds may be taxable to the IRA.

For example, if your IRA property is 50% financed (50% LTV loan), roughly 50% of the rental income and any future capital gain may be subject to UBIT. The exact calculation is more nuanced and depends on the average acquisition indebtedness over the tax year.

A few important points:

• UBIT is paid by the IRA, not by you personally
• The tax rates are the trust tax rates, which can be steep on higher amounts
• Solo 401(k) plans may have an exemption from UDFI on real property debt (consult your plan documents and CPA)
• The UDFI calculation reduces over time as the loan balance decreases

This is a complex area. We strongly recommend working with a CPA who specializes in self-directed retirement accounts before taking on any IRA property debt. The tax implications vary based on your plan type, the loan structure, and your overall IRA income.

We've written a detailed guide on UBIT and UDFI if you want to go deeper.

At First Note Capital, we're one of the few lenders specifically structured to make non-recourse loans against free-and-clear properties held in self-directed IRAs and solo 401(k)s.

Most banks won't do this. The non-recourse requirement eliminates the personal guarantee they rely on. The SDIRA structure adds complexity they don't want to manage. And the loan sizes (typically $100,000-$500,000) are too small for institutional lenders to pursue.

We built our IRA lending program around the reality that experienced IRA investors deserve access to their equity without being forced to sell. Our terms are straightforward: 50% LTV, non-recourse, 3-5 year balloon, and a reserve requirement to protect both you and us.

If you own a free-and-clear single-family property in your self-directed IRA or solo 401(k) and want to explore your options, we'd like to hear from you.