Pay Off Properties in an SDIRA.... Right?

Question

Re: Pay off vs. Don't Pay off your property - I have several properties in my Self Directed IRA (SDIRA) LLC, my retirement fund. Some of them are on conventional 30-year mortgages. I don't take any personal tax benefit from owning those properties, like writing off the mortgage loan interest on my personal tax return. Therefore, it makes sense to just focus hard on paying off those properties as quickly as possible, right?

Conversely, I can see the argument for maintaining some mortgage balance on your property as long as the numbers work and cashflow is strong in the direction of my goals. Am I missing something? Thx for helping out!

Brian Eastman · Answer

@Damon L. Davis

When you say "conventional mortgage", I hope you mean non-recourse mortgage.  You may not place a personal guarantee on debt associated with your IRA.

When the IRA uses debt financing, there is a small tax on the percentage of income generated from the non-IRA (borrowed) money.  The tax on Unrelated Debt-Financed Income is not significant, because the IRA will take advantage of deductions such as depreciation and interest on the note to reduce the amount of net taxable income.

If you are not familiar with these concepts, get with your plan provider and/or CPA to gain a better understanding.

With all that aside, the question of whether to pay off mortgages or not is a basic investing question that ultimately centers around the opportunity cost of the money.  If you can use $1000 to pay down debt at 6% or invest that $1000 in another opportunity that produces 9% or better, then investing that money elsewhere will typically produce a better net return for the IRA.

There are many other factors such as timeline to access the money, whether you intend to sell a property before paying off the note, etc., which is well beyond the scope of a web forum, but the basic premise above is the core question to start from.

Damon L. Davis · Answer

This is an excellent explanation... that I will read about 5x more times to comprehend. I’d love to talk to you more about this, pay you for your time, and make sure I’m getting this right.