For many real estate investors, leverage is a key factor to their plans for profits – leverage in the form of mortgage financing. When you introduce mortgage financing into Self Directed IRA ownership of real estate, a special tax called Unrelated Business Income Tax (UBIT) is triggered. The tax often isn’t detrimental as will be covered in another post, but nonetheless it reduces the profit.
For the self employed, a fantastic development has occurred over the past few years – the Solo 401(k). One distinct advantage of the Solo 401(k) over an IRA is that it is not subject to paying UBIT on profits from financed real estate. Eliminating UBIT by using a Solo 401(k) eliminates the need to file a return (Form 990-T) as well as the accompanying tax. Sound pretty good so far?
The difficulty in recent times has been obtaining nonrecourse financing. The leader of NR financing in the Self Directed IRA industry for the past few years has been North American Savings Bank. Last year, they took the familiarity of IRA lending and applied it to Solo 401(k). Unfortunately for many Solo(k) investors, this has only been available to plans who choose to name a custodian as trustee of the plan. Qualified plans (which is what all 401k plans are) are different than IRAs in that they are not required by law to name a custodian (bank or trust company) as trustee of the plan assets. Investors who establish Self Directed Solo 401(k) plans that name themselves as trustee for simplicity have not been able to readily obtain mortgage loans for their Solo (k) plan from NASB.
Well, as of this month, NASB has expanded their loan products to include a nonrecourse loan program for self trusteed Solo 401(k) plans. I caught up with Matt Allen to discuss the great news on UNLIMITED RETIREMENT ACCOUNT® Radio. The skinny is that the program is almost identical to the IRA lending program. If you aren’t familiar with their guidelines, check out the URA Radio show podcast as it become available soon.