IRA Private Lending: Complete Guide

Private lending is one of the most accessible and tax-efficient strategies available inside a self directed IRA. Instead of buying stocks or funds, your IRA acts as the lender on private loans, earning interest income that flows back into the account tax-deferred or tax-free. The borrower gets capital. Your IRA earns a fixed return secured by collateral. The income is predictable, the compliance rules are clear, and the tax treatment is favorable relative to many other SDIRA strategies.

This guide covers everything you need to build a private lending strategy inside an SDIRA: how the mechanics work, what loan structures are available, how to underwrite a private loan, what compliance rules apply, how interest income is taxed inside the IRA, and how to get started. For the foundational rules on opening and funding a self directed IRA, see our getting started guide. For the complete prohibited transaction framework, see our guide on IRA prohibited transactions. Explore the full library at IRA Guidelines and model potential returns with our IRA calculator.

How IRA Private Lending Works

When your self directed IRA makes a private loan, the IRA is the lender of record. All loan documents are executed in the name of the IRA, not in your personal name. The IRA funds the loan from its own account. The borrower makes payments directly back to the IRA custodian or loan servicer, not to you. Interest and principal flow back into the IRA account. Your custodian holds the promissory note as a custodial asset.

The process begins when you identify a lending opportunity and instruct your custodian to fund it. The custodian reviews the direction of investment form, confirms the transaction does not involve a prohibited party, and wires the loan proceeds to the title company or closing agent. From that point forward, the loan operates like any other private loan, with payments flowing to the IRA rather than to you personally.

The critical compliance point is that the IRA is always the lender, not you personally. You cannot guarantee the loan, co-sign the note, or receive any direct benefit from the transaction. You serve as the investment decision-maker directing the IRA, not as a party to the loan itself. Violating this distinction creates a prohibited transaction. For the full mechanics see our complete guide on private lending inside a self directed IRA.

Loan Structures Available to SDIRA Lenders

First Position Mortgage Notes

First position mortgage notes are secured by real property with the IRA holding a first lien. If the borrower defaults, the IRA has the right to foreclose and take title. First position loans carry the lowest risk in private lending because the lender has priority over all other creditors in foreclosure. Interest rates for IRA first position loans typically range from 8 to 12 percent depending on property type, borrower profile, and loan-to-value ratio.

Second Position Mortgage Notes

Second position mortgage notes are secured by real property where a first mortgage already exists. Second position loans carry higher risk because in a foreclosure the first lender is paid before the second lender receives anything. Interest rates are correspondingly higher, typically 10 to 15 percent or more. For a complete analysis of the risk and return tradeoffs see our guide on first lien vs second lien lending inside a self directed IRA.

Unsecured Notes and Business Loans

Unsecured promissory notes carry the highest risk because the lender has no collateral to pursue in a default. They are typically used for short-term bridge lending to known borrowers with strong track records, at interest rates that compensate for the absence of security. Business loans secured by equipment, receivables, or other business assets are also permissible, with underwriting focused on business cash flow in addition to collateral valuation.

Who Your IRA Cannot Lend To

The most important compliance rule in IRA private lending is knowing which parties are off-limits. A self directed IRA cannot lend to disqualified persons under IRC 4975. Lending is a transaction, and if the IRA lends money to a disqualified person, the loan is a prohibited transaction regardless of the interest rate, collateral, or arm’s length terms.

Disqualified persons include you as the account owner, your spouse, your parents, your grandparents, your children, your grandchildren, any entity you control more than 50 percent, any fiduciary of the IRA, and certain service providers to the IRA. Siblings, aunts, uncles, cousins, and unrelated third parties are generally not disqualified persons and your IRA can lend to them. For the complete framework on who qualifies as a disqualified person see our guide on who is a disqualified person in a self directed IRA.

How to Underwrite a Private Loan Inside Your IRA

Underwriting a private loan for your SDIRA involves the same fundamental analysis used in any private lending transaction, with the additional constraint that you cannot personally benefit from or personally guarantee any aspect of the deal.

Collateral Analysis

For real estate secured lending, most experienced SDIRA lenders target a maximum loan-to-value ratio of 65 to 70 percent of the property’s current market value. This cushion protects the IRA in a default scenario, ensuring that even after foreclosure costs and market softening, the IRA can recover its principal. Ordering an independent appraisal rather than relying solely on borrower-provided valuations is standard practice for any meaningful loan amount.

Borrower Analysis

The borrower analysis covers repayment capacity, credit history, and track record on similar transactions. A borrower with a strong track record of repaying private loans on similar projects is materially less risky than a first-time borrower regardless of collateral strength. All loan terms including interest rate, term, amortization or interest-only structure, prepayment terms, and default remedies should be documented in a professionally prepared promissory note executed in the name of the IRA. For a complete underwriting framework see our guide on how to underwrite a private loan inside a self directed IRA.

Loan Servicing for IRA Private Loans

Loan servicing involves collecting monthly payments, tracking interest and principal allocation, and handling default situations if they arise. Your SDIRA custodian holds the note but typically does not perform active loan servicing. The cleanest compliance approach is using a professional loan servicer who collects payments from the borrower and remits them to your IRA custodian, maintaining payment records and generating statements. This keeps you entirely at arm’s length from the day-to-day cash flows of the loan.

Some SDIRA investors self-service loans with careful documentation by directing borrowers to pay directly to the custodian. This requires meticulous records of every payment, allocation between principal and interest, and all borrower communications. Documentation becomes critical if the loan goes to default and foreclosure proceedings begin. For a complete guide to servicing arrangements see our guide on how IRA loan servicing works.

Tax Treatment of Private Lending Income Inside an IRA

Interest income from private loans made by a self directed IRA is not subject to UBIT. Private lending is considered passive investment activity, not an active trade or business, as long as the IRA is functioning as a lender on its own portfolio rather than as a company conducting lending as an ongoing business operation. Standard interest income from promissory notes flows into the IRA tax-deferred in a traditional SDIRA or tax-free in a Roth SDIRA without any Form 990-T filing requirement.

One scenario where tax complexity arises is if the borrower defaults and the IRA forecloses and takes title to the property. At that point the IRA has shifted from being a lender to being a property owner, and the tax rules that apply to IRA-owned real estate apply going forward. If the foreclosed property is later acquired with non-recourse financing, UDFI rules may apply to rental income from that property. For the non-recourse loan and UDFI framework see our guide on non-recourse loan rules for self directed IRAs.

Private Lending vs Direct Real Estate Ownership Inside an IRA

Both private lending and direct real estate ownership are popular SDIRA investment strategies and they serve different investor profiles.

Direct real estate ownership gives the IRA equity in a property with unlimited appreciation potential. The IRA captures appreciation, rental income, and eventual sale proceeds. However, the IRA also bears full responsibility for all property expenses, vacancies, maintenance, management, insurance, and property taxes, all of which must be paid from IRA funds at all times.

Private lending gives the IRA a fixed return secured by collateral. The IRA does not participate in appreciation beyond the agreed interest rate, but it also is not exposed to property-level expenses, vacancies, or management responsibilities. Private lending is generally a lower-effort, more predictable strategy than direct property ownership for SDIRA investors who want real estate exposure without property management complexity. For the best SDIRA custodians that support both strategies see our guide on the best self directed IRA companies for real estate investing.

Getting Started With IRA Private Lending

The first step is opening a self directed IRA with a custodian that supports private lending. Not all SDIRA custodians are set up to hold promissory notes and coordinate loan fundings efficiently. Choose a custodian with demonstrated experience in note transactions and clear fee disclosures for loan-related services. For help comparing custodians see our guide on how to compare self directed IRA custodians.

Once your SDIRA is funded, you identify a lending opportunity, complete your underwriting review, engage an attorney to prepare the loan documents in the name of the IRA, and submit a direction of investment form to your custodian instructing them to fund the loan. The custodian wires the funds at closing, receives the executed promissory note and security instrument, and holds them as custodial assets. Payments from the borrower flow back to the IRA account as they are received throughout the loan term. If you are also exploring gold and precious metals for your SDIRA portfolio alongside private lending, see our guide on the best gold IRA companies for 2026.

Frequently Asked Questions

Can my IRA lend money to anyone?

Your IRA can lend money to most third-party borrowers but cannot lend to disqualified persons under IRC 4975. Disqualified persons include you, your spouse, your lineal ancestors and descendants, entities you control at 50 percent or more, and fiduciaries of the IRA. Lending to a disqualified person is a prohibited transaction regardless of the interest rate or collateral, and it can cause the IRA to be fully distributed and subjected to income tax for the entire year. Always confirm no disqualified party is involved before funding any private loan through your SDIRA.

Does IRA private lending income trigger UBIT?

Standard interest income from private loans made by a self directed IRA is generally not subject to UBIT. Private lending at an individual portfolio level is considered passive investment activity, and passive interest income is exempt from UBIT. The income accumulates tax-deferred in a traditional SDIRA or tax-free in a Roth SDIRA without requiring a Form 990-T filing. If the volume or structure of your lending activity is characterized by the IRS as an ongoing trade or business, UBIT could theoretically apply, but this is uncommon for individual SDIRA investors managing their own note portfolios.

What happens if my IRA borrower defaults?

If a borrower defaults on a loan held by your SDIRA, the IRA can pursue the same remedies available to any lender, including demand for payment, workout and modification negotiation, and foreclosure on secured collateral. All remedies must be pursued in the name of the IRA through the custodian, not by you personally. If the IRA forecloses and takes title to the property, the IRA becomes a property owner and all IRA-owned real estate compliance rules apply going forward. You cannot personally manage a foreclosed property owned by your IRA without triggering a prohibited transaction.

What interest rate should my IRA charge on private loans?

Your IRA can charge any interest rate agreed upon between the IRA and the borrower. There is no minimum rate requirement for IRA lending to unrelated third parties. However, the interest rate should reflect the risk profile of the loan and be consistent with market rates for similar transactions. Charging a below-market rate on a loan where the borrower has any connection to you or your family warrants careful review to ensure the transaction does not appear designed to benefit the borrower at the expense of the IRA. Market-rate lending to arm’s-length third parties gives you full discretion over the rate negotiated.