Non-Recourse Loans, Prohibited Transactions, and Smarter Roth Conversions


Description

In this session, we dove deep into how non-recourse loans work for IRA investors, why banks require higher down payments, and how they look strictly at cash flow instead of emotions. We also discussed prohibited transactions, sweat equity rules, and family disqualification issues that trip people up. Then, we looked at smarter ways to do Roth conversions — including using undervalued notes or properties before they appreciate — so you pay tax on a smaller number and lock in more tax-free growth for life.


Key Takeaways

  • Non-recourse loans: No personal guarantees, no deficiency judgments — banks lend based on property value and cash flow.

  • Banks usually want 30% down, an appraisal, and proof of positive cash flow before lending to IRAs.

  • Commercial properties are valued on income and rent rolls, not emotions or comps like single-family homes.

  • Excess IRA cash often goes toward paying loans down faster — creating safe 6–7% returns.

  • All loan paperwork is the same as personal deals — just make sure the buyer is listed as your IRA (or IRA trust).

  • Always use attorneys for documents; custodians guide but don’t draft contracts.

  • Prohibited transactions: no sweat equity, no mixing funds, no hiring disqualified people (spouse, kids, parents).

  • You can check work, manage contractors, and review rent collections — just no hands-on labor.

  • Family rules can be tricky (e.g., son’s wife = disqualified, but in-laws may not be). Always get legal confirmation.

  • Roth conversion strategy: Convert assets at their current fair market value, not face value — e.g., discounted notes, rehab properties before improvements.

  • Read Keep It by Joel Luby before making conversion decisions — smart timing saves huge tax dollars.


Action Steps / Exercises

  1. Bank Standards Drill: Write down the 3 main things banks want before giving an IRA non-recourse loan (hint: down payment %, appraisal, cash flow).

  2. Sweat Equity Check: List 5 things you might be tempted to do yourself on an IRA property — then mark which are prohibited vs. allowed.

  3. Disqualified Person Map: Draw your family tree and circle which people are disqualified for IRA transactions.

  4. Conversion Strategy: Pick one undervalued asset you own (or could buy) and outline how converting it now could save on taxes.

  5. Reading Assignment: Order Joel Luby’s Keep It and write down 3 questions you want answered before your next Roth conversion.