IRA

Article by Mark Robbins, J.D.

Copyright October 1, 2025, All Rights Reserved

When it comes right down to it, why would you make a down payment of 40%, 50% or even more on the purchase of real estate with your IRA money or other retirement funds, when you can buy the same property with a down payment of 20% or 25% of conventional funds?

In addition to the higher down payment requirements, the interest rates are higher for ‘non-recourse’ loans. The IRS requires the investor to use these specialty loans when buying real estate with funds that haven’t been taxed except in the case of a Roth IRA or some 401k’s. Most, if not all investors, ask these same questions. The main reasons are quite simple once you know and understand the facts involved in the transaction.

First and foremost, IRA money, is money you can set aside to invest in just about any type of investment you want to invest in. You can deduct the amount you put into your retirement account from the regular income you report to the IRS. This can be as much as $7000 if you’re under 50 years of age or $8000 if you’re over 50. If you’re self-employed you can put aside a lot more than that depending on your annual income. Whatever amount you decide to put into an IRA or 401K or other retirement account vehicle like a pension plan, you can deduct that amount from the income you earn on an annual basis. This will reduce the taxes you have to pay when it comes time to file your tax return. I’m sure that most of you reading here already know this? It is common knowledge.

Real estate is very tangible. You can see it, feel it, touch it and even stand on it. In general, real estate is a solid investment that stands the test of time. It goes up and down in value but in the long run, it almost always goes up in value. That goes for the income the rental property generates along with the value of the real estate itself.

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Before I get into the real tangible advantages of IRA investing in real estate, you should also keep in mind that it’s much easier to qualify for this type of loan than a conventional loan. The main qualifier for a ‘non-recourse’ loan is having a property that has a good enough rental income to exceed the monthly expenses by a minimum of 20-25%. However, with a conventional mortgage, more often than not, you have to show prior years’ tax returns, proof of your income, your assets and have a good credit score to get an acceptable interest rate. Therefore, this just makes investing your IRA in real estate that much more attractive.

Now to the main advantage(s) of this investment being more interesting and providing the strongest reasons for investing your retirement dollars in real estate than other risk related investments.

There are two types of tax categories when owning real estate in one’s self-directed IRA account. If you own the property in your Roth IRA account, you will not have to pay any taxes on the income the property generates or the capital gain profits you derive from the property when you sell it. If you own real estate in a Solo 401K, your income from the property and/or your capital gains when you sell it flow back to your account tax deferred until such time that you decide to withdraw the funds for personal use in retirement.

Most investors have self-directed IRA’s, not Roth IRA’s or 401K’s. Those investors with 401K’s usually cannot use them until they leave the company they work for. The exception to this is those investors who are self-employed and set up their own 401K called a Solo 401K or some other form of self-directed pension plan.

Since the majority of investors use their self-directed IRA’s to start their own portfolio of real estate investments. The tax advantages work according to the ownership percentage your IRA has based on what amount it took to buy the property. Simply put, let’s assume for example, that you buy a single-family rental property for $500,000? You put down 50% of the purchase price, i.e. $250,000 and you finance the other 50% with a ‘non-recourse’ loan of $250,000. The IRS requires that you not personally guarantee the money you borrow if you’re buying an investment property with your IRA money as was previously mentioned. That’s a primary rule of thumb. Hence, the requirement that the mortgage be a non-recourse mortgage, means the mortgage lienholder has no recourse against the IRA investor should the investor default on making the monthly payment(s) for any reason. The lender can only seize the property, nothing else.

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That said, in our example, your IRA owns 50% of the property that you purchased with the IRA funds. The 50% of the purchase price that the IRA borrowed represents the same percentage of the profits, if there are any after deducting expenses, that will be subject to taxes. Therefore, whatever monthly profit the property derives from the rental income will be taxed under the category known as ‘Unrealized Business Income Tax’ commonly referred to as UBIT, as follows:

1. The first $1000 of profit, after deducting all monthly expenses is tax deferred and goes back to the IRA, 2. The remaining 50% of the profit, after deducting all expenses, goes back into the IRA tax deferred, 3. The remaining 50% balance of the profit will be taxed at the Trust rate of 37%. For this example, if we assume a monthly profit of $2500 after deducting all expenses, the first $1000 goes to the IRA tax deferred (only for the first month of ownership), the remaining $1500 of profit is divided up with $750 going back to the IRA tax deferred and the remaining $750 of profit gets taxed at the Trust rate of 37%. That amounts to $277.50 in tax. Therefore, on a profit of $2500, you’re out of pocket $277.50 which is a net tax of 11% of your $2500 net profit.

If this was a conventional investment with no retirement account involved, your $2500 profit would be taxed as ordinary income. Whatever your ordinary income tax rate is after deducting your monthly expenses would be what you would pay in taxes. Hence, assuming an ordinary income tax rate of 25%, your tax on $2500 of profit (after expenses, of course) would be $625 or about 3 times more than if you used your IRA to make the same investment.

When it comes to selling the property you bought with your IRA, the second form of tax advantage that applies to any long-term capital gains when the property has been held for more than one year by your IRA is called ‘Unrealized Debt Financing’ (UDFI). The same formula described above that correlates to the percentage of ownership by the IRA versus the percentage of financing that remains owing is how the IRS quantifies what the tax on those gains will be. Simply stated, assuming a capital gain of $100,000 is realized in the sale of the IRA owned property and, also assuming the property still owes 20% of the original debt incurred when it was purchased, then 20% of the gain will be taxed at the long-term capital gain rate based on one’s taxable income rate. Based on those rates for 2025, most individual’s income tax bracket for income if married and filing jointly according to the world-wide web is between $96,701 and $600,050, the long term capital gain rate is 15%. That 15% rate also holds true for those who are single earning between $48,351 and $533,400 as well as those married earning between $48,351 and $300,000 filing separately. The capital gain rate jumps up to 20% on gains if your earnings exceed these numbers. Hence, for purposes of our example of a capital gain of $100,000 for the sale of the IRA owned property, 80% of that gain would go back to the IRA account tax deferred; only 20% of that gain, or $20,000, would be taxed at the capital gain rate of 15%. This would result in a tax of $3000 on a long-term capital gain of $100,000 for your IRA owned property.

Now if you experienced a capital gain of $100,000 on a property purchased with conventional funds, you would end up paying 15% of the total gain you realized. That would be $15,000 on a gain of $100,000. That’s 5 times higher than the tax you’d pay if the property is owned by the IRA, you see the math! There would not be any deduction for the percentage of ownership by an IRA. You bought it with conventional funds so you pay whatever the tax rate is. The gains are even more exponentially greater if you own the property in a Roth IRA where you don’t have any taxable requirements!

If you go back to the beginning of this article you can now better understand why, in the long term, it makes greater sense to invest your IRA in real estate if you have the necessary capital for the down payment, versus investing with conventional funds that don’t provide any tax relief despite the higher down payment requirements and/or the higher interest rates. Moreover, you are still able to deduct expenses with the IRA owned property which makes the gains less, and in turn, reduces the tax to be paid.

Of course, there are no guarantees when it comes to investing. One can lose money in real estate just as they do in the stock market or other investment vehicles, but real estate doesn’t disappear like stocks for example and, if nothing else, it can be used to create income by renting it out which cannot be done with stocks or bonds. However, that’s not what with this article is about or was meant to discuss. Every investment has its advantages and disadvantages. This article was meant simply to provide you, the investor, with the knowledge to invest wisely in real estate. Using one’s IRA to do so is an excellent option especially when you consider the way the gains are treated by the IRS tax code.

As you can surmise from what has been discussed here, the general formula for understanding how the IRS treats the gains from IRA owned property is this. The percentage of property ownership by the IRA is the same percentage of profits that go back into the IRA tax deferred. Only the percentage of ownership attributable to the borrowed or mortgage amount is what is taxed when it comes to determining the gains for the IRA. This is the advantage you don’t have with any other investment! I hope this explanation of the tax treatment for IRA owned properties helps you to better realize the benefits of holding real estate in your respective retirement accounts!*

*FOOTNOTE: Please note that the investor(s) should always consult their respective tax specialist about taxes in general. I am not an accountant, however, I have been facilitating non-recourse loans for real estate investors since they were first introduced to the public in 2004 by North American Saving Bank based in Kansas City, Missouri. My experience has given me a great deal of knowledge and understanding about this subject.

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Meet Mark Robbins

Mark Robbins has pioneered non-recourse financing for IRA investors since leveraged financing became available to the public through a small bank in the Midwest in 2004. Since that time only a few select banks even offer these loans. He has established and maintained relationships with these lenders over the past twenty years.

Mark has obtained non-recourse loans, per IRS regulations, for numerous real estate investors in more than 30 states including Hawaii. Mark is a preferred provider for many of the IRA servicing companies including the Equity Trust Company, uDirect IRA, the Provident Trust Group, Entrust and many other IRA custodial and administrative providers for clients who require non-recourse financing for their IRA funded real estate investments.

Mark graduated from New York University in Bronx, New York with a B.A. in History and Western State College of Law in Fullerton, California with a Juris Doctorate (J.D.). Mark is an entrepreneur and has operated several different businesses over the past forty years including a division of a major commodities investment firm, his own hi-tech executive search company and presently a commercial real estate mortgage brokerage company known as Lending Resources Group Inc. that he founded in 2007.

He has been a real estate investor and developer having designed and built four homes since 1982. He became a mortgage banker in 2002 with Bank of America and went on to work for CTX Mortgage, a division of the home building company, Centex Corp., in Dallas. Mark was recruited to start an in-house mortgage division for a popular townhome development company in San Francisco in 2006. That firm dissolved in the wake of the financial crisis in 2007=2008. During his tenure in mortgage banking, Mark has generated more than $120 million in residential and commercial mortgages for homeowners and investors nationwide.

If you have any questions about how to invest your IRA in real estate, please contact Mark at 415-309-1803 or by email: [email protected]. You can also reference his website at: www.lendingresourcesgroup.com.