Did you know that certain lenders, like COGO Capital, allow you to acquire a loan to purchase real estate investment assets through your IRA instead of you personally? These types of loans are called “Non-Recourse” loans and are not very common. But they can be a powerful strategy for you on your path to building wealth. Let’s explore this strategy below.
Before we dive into the juicy details, here is the disclaimer: We at Secured Investment Corp are not licensed tax or financial advisors, and as such, do not provide tax or financial advice. If you are looking for that type of advice, please seek out a licensed professional.
First, we should touch on a few key points. Non-recourse loans are loans made to your self-directed IRA, not to you as an individual. This means in the event of default or foreclosure, the lender can ONLY go after the asset itself, not you, as you can NOT personally guarantee the loan. Furthermore, the lender can NOT go after any other asset you hold in your IRA, just the one they lent capital on. Now because of that, it is rare for lenders to originate these types of loans. Typically, lenders want a more traditional recourse loan, requiring you to personally guarantee the repayment of the loan, which allows the lender to seize the asset and come after you to cover any potential losses in the event of default or foreclosure.
Taxes! In a lot of cases, you do not have immediate tax liabilities when investing through tax advantaged accounts like self-directed IRA’s. However, through a non-recourse loan you will likely run into what is called “Unrelated Debt Financed Income” tax or UDFI tax. On a high level, UDFI tax applies to the portion of the profits tied to the financed amount of the property. So, let’s say you cover 25% of the asset with your self-directed IRA funds and finance the remaining 75%. When you sell the asset, 75% of the profits will be subject to UDFI tax. Now I know what your thinking; I have this IRA set up so that I do not have these tax liabilities, so why would I want to utilize this strategy. Our opinion (not advice as we are not licensed tax professionals) is that taxes such as UDFI tax, are a success tax, and your IRA pays it as all the profits sit in that IRA. So why not? This strategy could be a great way to grow your wealth at much faster rates than some other investments.
Non-recourse loans can be a great strategy for those looking to grow their wealth and their retirement accounts or for those that may have more in their retirement accounts than they have cash on hand. Either way you can take control of your retirement and your wealth by utilizing this strategy when flipping real estate. While you cannot pay yourself any of the profits, as it all flows into your IRA, this strategy is a great option for those looking to invest into real estate.
Whether you are looking to take advantage of non-recourse loans to flip real estate, or to invest passively in notes and funds, you will need a self-directed IRA. You can seed these accounts with cash or old 401(k)’s so be sure to check out a few custodians to learn more: Alto IRA, Equity Trust Company, Strata Trust Company.
Interested in learning more about non-recourse loans or other passive real estate backed investments? Click the link below and schedule a call with our team today.
Disclaimer: Secured Investment Corp. does not provide tax, legal or investment advice. Any information communicated by Secured Investment Corp. is for educational purposes only, and should not be construed as tax, legal or investment advice. Whenever making an investment or financial decision, please consult with your tax attorney or financial professional.