[DSCR](/blog/what-is-dscr-ratio) Loans with Solo 401k: Retirement Real Estate

Using retirement funds to invest in real estate sounds like the ultimate wealth-building strategy: tax-deferred or tax-free growth on rental income and appreciation. Solo 401(k) plans offer self-employed individuals the ability to invest in alternative assets, including real estate, without the custodian restrictions of traditional IRAs.

But combining Solo 401(k) accounts with [DSCR loans](/blog/dscr-loan-guide) requires navigating strict IRS rules, finding specialized non-recourse lenders, and understanding complex tax implications like UBIT (Unrelated Business Income Tax). Get it wrong, and you could disqualify your entire retirement account.

This guide explains exactly how to use your Solo 401(k) to buy rental property with DSCR financing, stay compliant with IRS rules, and maximize tax advantages.

Solo 401(k) Basics for Real Estate

What Is a Solo 401(k)?

A Solo 401(k) (also called an Individual 401(k) or Self-Employed 401(k)) is a retirement plan designed for self-employed individuals and small business owners with no full-time employees other than a spouse.

Key features:

• High contribution limits: Up to $70,000/year in 2026 (or $77,500 if age 50+), significantly more than IRAs
• Roth option: Can contribute Roth dollars for tax-free growth
• Loan provision: Can borrow from the plan (though this affects [real estate investing](/blog/brrrr-strategy-guide), discussed below)
• Checkbook control: With a self-directed Solo 401(k), you have direct control to write checks and make investments without custodian approval for each transaction

Eligibility:

• Self-employment income (W-2 from your S-Corp, 1099 income, or sole proprietorship)
• No full-time employees (except spouse)

Why Use a Solo 401(k) for Real Estate Instead of a Self-Directed IRA?

Higher contribution limits: IRAs max out at $7,000/year ($8,000 if 50+). Solo 401(k)s allow 10x that amount, building buying power faster.

Checkbook control: Self-directed IRAs typically require custodian approval for every transaction (paying contractors, repairs, etc.). Solo 401(k)s let you act as trustee with direct control.

Roth option: Solo 401(k)s can accept Roth contributions, allowing tax-free growth and distributions. Self-directed Roth IRAs have much lower contribution limits.

Loan provision: You can borrow from a Solo 401(k) (up to $50,000 or 50% of vested balance) for other purposes, though loans generally aren't used for the real estate purchase itself.

Fewer custodian fees: Some Solo 401(k) providers charge flat annual fees instead of asset-based fees, saving money as your portfolio grows.

IRS Rules for Solo 401(k) Real Estate Investments

Prohibited Transactions

The IRS prohibits transactions between the Solo 401(k) and "disqualified persons," which include:

• You (the plan participant)
• Your spouse
• Your lineal ascendants and descendants (parents, grandparents, children, grandchildren)
• Spouses of your descendants
• Entities you control (50% or more ownership)
• Fiduciaries of the plan

What this means:

You CANNOT:

• Live in the property owned by your Solo 401(k)
• Rent the property to yourself, your spouse, your children, or your parents
• Use the property personally (even for a weekend)
• Sell your personal property to your Solo 401(k)
• Receive a salary for managing the property
• Have your company provide services to the property (e.g., your construction business can't renovate it)
• Use personal funds to pay property expenses (all expenses must come from Solo 401(k) funds)
• Personally guarantee the loan (hence the need for non-recourse financing)

You CAN:

• Buy property solely for investment
• Rent to unrelated third parties at market rates
• Hire third-party property management (paid from Solo 401(k) funds)
• Sell the property to unrelated third parties

Penalty for violation: If the IRS determines you engaged in a prohibited transaction, the entire Solo 401(k) is disqualified, meaning all funds become immediately taxable plus a 10% early withdrawal penalty if you're under 59½.

Non-Recourse Loan Requirement

Because you can't personally guarantee a loan for a Solo 401(k)-owned property (that would be a prohibited transaction), financing must be non-recourse.

Non-recourse loan definition: The lender's only recourse in default is the property itself. They cannot pursue the borrower (the Solo 401(k) plan) for a deficiency judgment or come after other plan assets.

DSCR loans as non-recourse financing: Most standard DSCR loans require personal guarantees, disqualifying them for Solo 401(k) use. However, specialized non-recourse DSCR lenders exist specifically for retirement account real estate investing.

Key differences from standard DSCR loans:

• Lower LTV: Non-recourse loans typically max out at 50-70% LTV (compared to 75-80% for standard DSCR loans)
• Higher rates: Expect 1-2% higher interest rates due to increased lender risk
• Stricter DSCR requirements: Many require minimum 1.25-1.30 DSCR
• Larger down payments: 30-50% down payment is typical
• Higher credit scores: Some require 700+ FICO

Unrelated Business Income Tax (UBIT)

When a tax-advantaged retirement account uses debt financing to acquire property, the portion of income attributable to debt is subject to Unrelated Debt-Financed Income (UDFI) tax, a subset of UBIT.

How UDFI is calculated:

UDFI percentage = Average acquisition debt / Average property value

Example:

• Property value: $400,000
• Loan amount: $280,000
• UDFI percentage: 280,000 / 400,000 = 70%

Result: 70% of the rental income is subject to UBIT, taxed at trust tax rates (which are compressed and reach the highest bracket quickly).

UBIT tax rates (2026 approximation):

• Up to $3,050: 10%
• $3,050 - $9,850: 24%
• $9,850 - $13,450: 35%
• Over $13,450: 37%

These rates apply to the taxable portion of net income (rental income minus expenses).

Important: UBIT only applies to the leveraged portion. If you pay off the loan, UDFI disappears. Income from the equity portion (30% in the example) remains tax-deferred.

UBIT exemption threshold: If UBIT liability is under $1,000 for the year, no filing is required. Many investors structure deals to stay under this threshold.

Form 990-T Filing

If your Solo 401(k) has UBIT exceeding $1,000, you must file Form 990-T and pay the tax from plan assets. This requires additional accounting and compliance.

Finding Non-Recourse DSCR Lenders for Solo 401(k)

Specialized Lenders

Not all DSCR lenders offer non-recourse loans. You need lenders who specialize in retirement account [real estate financing](/blog/balloon-mortgage-explained).

Where to find them:

IRA/401(k) custodians: Many self-directed IRA custodians maintain relationships with non-recourse lenders and can provide referrals.

Real estate investor groups: Members with Solo 401(k) experience can share lender contacts.

Mortgage brokers specializing in alternative financing: Ask specifically for non-recourse DSCR loan sources.

Online research: Search "non-recourse loans for Solo 401k" or "self-directed IRA real estate loans."

Examples of lender types (not endorsements):

• North American Savings Bank (NASB)
• Community lending institutions in self-directed IRA hubs (e.g., San Diego, Phoenix, Dallas)
• Private lenders specializing in alternative retirement accounts

Underwriting Criteria

Non-recourse lenders focus almost exclusively on the property because they have no personal recourse:

Property cash flow (DSCR): Typically require minimum 1.25-1.40 DSCR. Some require up to 1.50 for conservative underwriting.

Property type: Single-family and small multifamily (2-4 units) most common. Some lenders finance larger multifamily or commercial property.

Property condition: Must be in good condition, often requiring a property inspection or appraisal showing no deferred maintenance.

Location: Lenders prefer primary and secondary markets with strong rental demand and appreciation history.

Reserves: May require the Solo 401(k) to maintain 6-12 months of reserves in cash or liquid assets within the plan.

Credit score: Some non-recourse lenders don't check personal credit scores (because there's no personal guarantee), while others use it as a risk indicator and price accordingly.

Loan terms:

• LTV: 50-70% typical
• Interest rates: 7-10% (as of 2026, varies with broader market)
• Amortization: 15-30 years
• Term: Often 5-year balloon with 30-year amortization

Application Process

Step 1: Ensure your Solo 401(k) is established and funded with sufficient capital for the down payment, closing costs, and reserves.

Step 2: Identify a property and conduct due diligence (inspection, appraisal, rent comps, DSCR calculation).

Step 3: Apply with the non-recourse lender using your Solo 401(k) plan name as the borrower (e.g., "John Doe Solo 401(k) Plan").

Step 4: Provide required documentation:

• Solo 401(k) plan documents showing you as trustee
• Proof of funds for down payment and closing costs (account statements)
• Property purchase contract
• Rent roll or estimated rental income (based on comps)
• [Property appraisal](/blog/appraisal-process-explained) or BPO (broker price opinion)

Step 5: Underwriting focuses on DSCR, property condition, and LTV. The lender may require a third-party property management agreement (to avoid prohibited transaction issues).

Step 6: Closing in the name of the Solo 401(k) plan (e.g., "John Doe, Trustee of the John Doe Solo 401(k) Plan").

Setting Up Your Solo 401(k) for Real Estate

Choose a Provider

Not all Solo 401(k) providers allow real estate investments. You need a self-directed Solo 401(k) provider.

Key features to look for:

Checkbook control: Ability to set up a plan with an LLC or trust that you control, giving you direct check-writing authority.

Real estate permissibility: Explicitly allows alternative investments including real estate.

Flat fee structure: Avoid asset-based fees that grow as your [real estate portfolio](/blog/how-to-finance-multiple-properties) appreciates.

Responsive support: You'll have questions about prohibited transactions and compliance—accessible support matters.

Examples of provider types:

• Self-directed IRA/Solo 401(k) companies (e.g., providers specializing in alternative assets)
• Some brokerage firms (though most don't support real estate)
• Attorneys specializing in Solo 401(k) formation (can draft custom plans)

Typical costs:

• Setup: $500-$2,000
• Annual administration: $200-$500/year

Checkbook LLC Structure

Many Solo 401(k) real estate investors use a Solo 401(k) + LLC structure:

1. Establish the Solo 401(k) plan
2. Form an LLC (e.g., "Main Street Investments LLC")
3. The Solo 401(k) buys 100% of the LLC
4. The LLC purchases the real estate

Benefits:

• Checkbook control: You (as LLC manager) write checks for property expenses without custodian approval
• Cleaner title: The property is titled to the LLC rather than "[Your Name], Trustee of [Plan Name]," which can be long and cumbersome
• Simplified transactions: Rent, expenses, and loan payments flow through one LLC checking account

Compliance requirement: The LLC exists solely for the Solo 401(k)'s benefit. All income flows back to the Solo 401(k), and you cannot benefit personally.

Funding the Plan

To accumulate enough for a down payment (typically $75,000-$150,000 for a $250,000-$500,000 property at 30-50% down):

Annual contributions:

• Employee deferral: Up to $23,000/year (2026)
• Employer profit-sharing: Up to 25% of compensation
• Total max: $70,000/year ($77,500 if age 50+)

Rollover from existing retirement accounts:

• 401(k) from former employer: Can rollover into Solo 401(k)
• Traditional IRA: Can rollover into Solo 401(k)
• Roth IRA: Can rollover into Roth Solo 401(k)

Many investors jumpstart their Solo 401(k) with a rollover from a previous employer's 401(k) or from IRAs, immediately creating enough capital for a down payment.

Operating the Property Within the Solo 401(k)

All Money Flows Through the Plan

Income:

• Rent collected goes directly into the Solo 401(k) (or LLC owned by the Solo 401(k))
• Deposits made to an account in the plan or LLC's name

Expenses:

• Mortgage payments, property taxes, insurance, repairs, property management fees—all paid from Solo 401(k) funds
• You cannot pay expenses personally and get reimbursed (prohibited transaction)

Cash flow shortfalls:

• If expenses exceed rent, you must contribute funds to the Solo 401(k) (subject to annual limits) or maintain sufficient reserves

Property Management

You cannot manage the property yourself and receive compensation (prohibited transaction). However, you can:

Option 1: Manage the property yourself without compensation—legal but labor-intensive.

Option 2: Hire a third-party property management company (paid from Solo 401(k) funds)—cleanest approach and avoids prohibited transaction risk.

Option 3: Have a spouse or family member manage the property if they're not disqualified persons and compensation is at market rates—risky, consult a Solo 401(k) attorney first.

Repairs and Improvements

All repairs and capital improvements must be paid from Solo 401(k) funds. You cannot:

• Perform repairs yourself and charge the plan
• Have your company provide services
• Pay for repairs personally

You can hire third-party contractors and pay them from the Solo 401(k) account.

Refinancing

You can refinance the property to secure better rates or cash out equity, but:

• New loan must also be non-recourse
• Cash-out proceeds return to the Solo 401(k) (you can't take them personally)
• Refinancing costs (appraisal, title, etc.) paid from Solo 401(k) funds

Tax Strategies and UBIT Minimization

Minimize UDFI with Higher Down Payments

The more equity you contribute, the less debt you carry, and the lower your UDFI percentage.

Example:

Scenario A (30% down):

• Property: $400,000
• Down payment: $120,000
• Loan: $280,000
• UDFI: 70%

Scenario B (50% down):

• Property: $400,000
• Down payment: $200,000
• Loan: $200,000
• UDFI: 50%

Scenario B reduces the taxable portion by 20 percentage points, significantly lowering UBIT liability.

Pay Down the Loan Aggressively

UDFI is calculated based on average debt during the year. As you pay down the loan, the UDFI percentage drops.

Year 1: Loan balance averages $280,000 → 70% UDFI Year 10: Loan balance averages $200,000 → 50% UDFI Year 20: Loan paid off → 0% UDFI

Once the property is free and clear, all income is tax-deferred (Traditional Solo 401(k)) or tax-free (Roth Solo 401(k)).

Use Roth Solo 401(k) for Long-Term Holds

If you expect to hold the property for decades and eventually pay off the loan, using Roth Solo 401(k) funds means:

• UBIT paid during leveraged years
• Tax-free income once loan is paid off
• Tax-free distributions at retirement

Traditional Solo 401(k) funds result in taxed distributions at retirement. Roth provides tax-free withdrawals, making long-term real estate holdings extremely tax-efficient.

Stay Under the $1,000 UBIT Threshold

If you can structure the deal so UBIT remains under $1,000/year, you avoid Form 990-T filing and tax payment.

Example:

• Rental income: $30,000/year
• Expenses: $24,000/year
• Net income: $6,000
• UDFI percentage: 50%
• UBIT taxable income: $3,000

If the first $3,050 is taxed at 10%, UBIT = $300, staying under the $1,000 threshold.

Adjust by taking larger depreciation deductions, increasing expenses (property management, repairs), or structuring lower LTV loans.

Risks and Considerations

Liquidity

Real estate is illiquid. Once your Solo 401(k) funds are tied up in property, you can't easily access them without selling the property.

Mitigation: Maintain reserves in the Solo 401(k) for unexpected expenses or opportunities.

Prohibited Transaction Risk

A single mistake—renting to your child, paying a repair bill personally, vacationing at the property—can disqualify the entire plan.

Mitigation: Work with a Solo 401(k) attorney or consultant. Document everything. When in doubt, ask before acting.

UBIT Complexity

Calculating and paying UBIT adds complexity and requires filing Form 990-T. Mistakes can result in penalties.

Mitigation: Hire a CPA experienced with Solo 401(k) real estate and UBIT calculations.

Limited Financing Options

Non-recourse DSCR lenders are less common, rates are higher, and LTV is lower. You'll have less leverage than with conventional financing.

Tradeoff: Tax-deferred or tax-free growth may outweigh the higher financing costs.

Market Risk

Real estate values fluctuate. A downturn affects your retirement savings directly.

Mitigation: Diversify. Don't put 100% of your Solo 401(k) into one property. Consider multiple properties or blending real estate with other investments.

Frequently Asked Questions

Can I use a Solo 401(k) loan to buy real estate?

Solo 401(k) plans allow participant loans up to $50,000 or 50% of the account balance. However, you generally can't use a Solo 401(k) loan as the down payment for a property purchased by the Solo 401(k) (that's a prohibited transaction). You could use the loan for a personal real estate purchase outside the plan, but then it's not a tax-advantaged investment.

What happens to the property when I retire?

You can take distributions in cash (by selling the property and distributing proceeds) or in-kind (transferring the property to yourself personally). In-kind distributions are valued at fair market value and taxed accordingly (unless it's a Roth and you're over 59½).

Can I partner my Solo 401(k) with personal funds or another investor?

Yes, the Solo 401(k) can own a percentage of the property with your personal funds or another investor owning the rest, as long as all transactions are arm's length and market rate. However, you still can't live in or use the property personally, and your percentage of income must flow to the appropriate party.

Can I buy a property with my Solo 401(k) and sell it to myself later?

No. Selling the property to yourself or a disqualified person is a prohibited transaction.

Do I need a special Solo 401(k) plan document?

Yes. Generic Solo 401(k) plans may not allow real estate or may lack provisions for checkbook control. Use a provider that specializes in self-directed Solo 401(k) plans with real estate provisions.

What if I can't make the mortgage payment from Solo 401(k) funds?

You'll need to contribute additional funds to the Solo 401(k) (up to annual limits) or sell the property. You cannot use personal funds to cover shortfalls—that's a prohibited transaction. This is why reserves and conservative DSCR ratios are critical.

Can I use my Solo 401(k) for short-term rentals (Airbnb)?

Technically yes, but [short-term rental income](/blog/airbnb-hosting-guide-beginners) may generate additional UBIT beyond UDFI, and the IRS may classify it as an active business rather than passive investment. Consult a Solo 401(k) tax expert before pursuing short-term rentals.

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Using a Solo 401(k) to invest in real estate with DSCR financing is a powerful wealth-building strategy—if executed correctly. The combination of high contribution limits, checkbook control, and tax-advantaged growth can dramatically accelerate retirement savings.

However, the complexity is real: IRS prohibited transaction rules are strict, non-recourse financing is more expensive and harder to find, and UBIT adds tax compliance. This strategy works best for self-employed investors with:

• Significant Solo 401(k) balances or high annual contributions
• Understanding of real estate investing fundamentals
• Access to experienced Solo 401(k) and tax professionals
• Discipline to follow IRS rules meticulously

When structured properly, the tax benefits can be extraordinary—especially with Roth Solo 401(k) funds held long-term. The key is treating your Solo 401(k) as the sacred retirement vehicle it is, and never blurring the line between personal benefit and plan investment.

Related Articles

• Credit Score Requirements for DSCR Loans
• [[Rental Property Depreciation](/blog/depreciation-real-estate-guide) Guide: How to Maximize Your Tax Deductions in 2026](/blog/depreciation-rental-property-guide)
• Credit Score Requirements for DSCR Loans