What is a non-recourse loan?
A non-recourse loan is one in which the IRA account holder is not personally liable for the repayment of the loan. The non-recourse lender cannot pursue other assets owned by the account holder or the IRA. The IRA must repay the loan. You may not repay the loan for the IRA.
Why must I use a non-recourse loan?
The IRS code IRC 4975 (c)(1)(B), specifically states that a prohibited transaction occurs when there is a lending of money or another extension of credit between a plan (IRA) and a disqualified person. Remember, you cannot use your own credit to obtain a loan. Similarly, you cannot guarantee any loan if your IRA is purchasing real estate. With a non-recourse loan, the bank secures the loan against the property. If the borrower defaults (the IRA), the lender/issuer can seize only the collateral, which is usually the property purchased through the IRA. To sum up, use a non-recourse loan to avoid the extension of credit.
What are the criteria?
Keep in mind:
- To lessen the risk of repayment, non-recourse lenders typically require for the IRA to put a larger down payment.
- Ask the lender about timing and fees
- The lender will look at:
- IRA cash balance
- Property condition
- Estimated cash flow
What about UDFI tax?
Keep in mind, your IRA is subject to UBIT and UDFI tax on the net income from debt. In other words, you will be taxed on non-retirement dollars. The retirement dollars will still receive special tax treatment. Unrelated Debt Financed Income (UDFI) is covered in IRC 514. If you are using your IRA and a non-recourse loan to purchase a property, the debt financing transaction will subject the IRA to UDFI.
If your IRA does owe UDFI, it is best to consult a tax professional to prepare IRS Form 990-T. Once completed, you can submit Form 990-T to Entrust with your authorization to file and pay the UDFI tax. To find out more about UDFI, please see IRS publication 598 or speak with your tax advisor.
What are the next steps?
Below is a list of lenders who may work with IRAs. They offer non-recourse loans that meet the IRS standards. IRA Club has no affiliation with any lender and earns no commission, fees, or other payments. You may contact these or other lenders when seeking leverage for your IRA project.
|First Western Federal||Click Here||605-341-1203|
|North American Savings Bank||Click Here||855-211-3340|
|First Bank||Click Here||303-347-5905|
|SouthStar Bank||Click Here||830-672-1081|
|Red Rock Capital||Click Here||719-900-5400|
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