Invest in all types of commercial properties with your Real Estate IRA

From retail to office buildings—it’s all possible. If your IRA doesn’t have enough cash for these types of investments, your IRA can apply for a non-recourse loan or partner with other funding sources. Commercial property is a broad category of real estate investments which includes anything from a grocery store or an office building or baseball field. This type of investment is another way to generate rental income over the long term.

4 very important factors to consider when purchasing commercial real estate in an IRA:

1. Due diligence for your property

Commercial real estate properties are different from residential properties in terms of assessing value. Before signing a contract, allow yourself ample time to perform the necessary due diligence on the property. Make sure the seller understands what you are asking for and verify the true property value. Examples of due diligence include researching any claim history on the property, confirming the quality of tenants, and reading all documents associated with the property, such as leases, insurance policies, and permits.

2. How expenses work on your property

The IRA is the owner of the real estate, not the IRA holder. This means the IRA pays all purchase and maintenance costs, and all income (e.g., rent) goes back to the IRA. You must use IRA funds for all maintenance costs or other expenses related to the property. For more information, see Income and Expenses.

3. Non-recourse loans for real estate purchases

Non-recourse debt or a non-recourse loan is a loan secured by pledge of collateral, typically property, but for which the borrower is not liable. The difference between recourse and non-recourse loans is that if the borrower defaults on a non-recourse loan, the lender/issuer can seize only the collateral. To facilitate a property purchase under a self-directed Real Estate IRA, you must use a non-recourse loan for all real estate purchases. To learn more, read our section on non-recourse loans.

4. UBIT and UDFI taxes on your property

If you use your IRA to purchase real estate using a non-recourse loan, the debt-financed portion of the property’s profits may be subject to UBIT. UBIT, or Unrelated Business Income Tax, is the tax assessed on profits derived from certain assets of IRAs or other plans. It is mostly associated with an IRA running an active business. The Unrelated Debt-Financed Income (UDFI) tax is a subset of UBIT. Learn more and read about real life examples of UBIT and UDFI.

Disclaimer: Before you invest in this business sector using your IRA, it is best to consult with your investment, legal and tax advisor.  Entrust does not endorse or recommend any of these investments.  Proper due diligence by you the IRA holder is recommended before entering into any transaction. 

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