Non-recourse loans: how an IRA borrows money

Your IRA can use leverage. It just cannot use the mortgage you are used to.

Why non-recourse is the only option

A conventional mortgage is recourse: default and the lender can pursue the borrower personally. For an IRA purchase, the borrower is the account and the only person available to guarantee it is you.

Section 4975 prohibits the extension of credit between a plan and a disqualified person. You are a disqualified person. Your guarantee is an extension of credit. The consequence is the entire account treated as distributed, with tax on the full balance and a 10% additional tax if you are under 59 and a half.

So the loan has to be non-recourse: the property is the only collateral, the lender's remedy is foreclosure, and nobody signs personally. That is a genuinely different credit product, which is why it comes from a small set of specialist lenders rather than from your bank.

What the terms look like

Non-recourse pricing reflects the lender's narrower remedy. Expect, in general terms:

• Lower leverage. Roughly 50% to 65% loan to value is typical, sometimes up to 70% on strong assets. Do not plan on 80%.
• Higher rate than a comparable conventional investment property loan.
• Shorter terms with balloons, often five to ten years, and amortization sometimes longer than the term.
• Reserve requirements. The lender wants to see cash inside the account after closing, because it cannot call you for a shortfall.
• Property type preferences. Stabilized, income producing, ordinary asset types. Raw land, heavy construction, and unusual properties are hard to finance non-recourse.
• Real closing costs, including lender legal fees.

The practical consequence: you need more equity than you are used to. A $200,000 property at 60% leverage means the account brings $80,000 plus closing costs plus a reserve. If the account cannot cover that, the deal is not available, and there is no personal cash bridge that fixes it.

Find the lender before the property

Non-recourse lending to retirement accounts is a specialty. The lenders are small in number, they are not at every bank, and their underwriting boxes are narrow.

Get pre-qualified before you shop. Know your leverage, rate, reserve requirement, and eligible property types up front. Discovering during due diligence that no non-recourse lender will touch your asset at your leverage is an expensive way to learn.

Ask directly: do you lend to IRAs and qualified plans, non-recourse, with no personal guarantee. If the loan officer hesitates on any part of that sentence, they do not do this product, whatever their website says.

The tax consequence of borrowing

Leverage inside an IRA creates unrelated debt-financed income. The debt-financed percentage of net income becomes taxable to the account at trust rates, and the same percentage applies to the gain at sale using the highest debt in the trailing 12 months.

Annual UDFI on a single leveraged rental is usually modest, often eliminated entirely by depreciation and interest deductions in the early years. UDFI at sale is where the number becomes serious.

The main lever is the 12 month lookback: retire the loan more than a year before selling and the gain comes out exempt. That requires planning a year before a sale date you may not have yet, which is the argument for having the conversation with your CPA at purchase rather than at exit.

An illustration

The account has $95,000. Unleveraged, it buys a $85,000 property and holds $10,000 in reserve. Rent nets roughly $7,000 a year, all of it exempt.

Leveraged at 60%, the same $95,000 supports a $200,000 property: $80,000 down, about $7,000 in closing costs, $8,000 left as reserve, which is thin. Net cash flow after debt service is perhaps $6,500, and roughly 59% of the net income before depreciation falls into the UDFI computation, though depreciation and interest may absorb it entirely in the early years.

The leveraged version controls a much larger asset with similar current cash flow, more upside on appreciation, a thinner reserve, and a tax obligation at sale. Neither is obviously right. The point is that leverage inside an account is not the same trade as leverage outside one, because the tax shield you normally get from interest and depreciation has nowhere to go.

If you have self employment income

A solo 401k gets a statutory exception for debt-financed real property that an IRA does not get. For a leveraged strategy that difference is often larger than every other consideration on this page combined. Check your eligibility before you commit to the IRA.

Illustrative arithmetic only. Your CPA decides your situation.