There are two important rules to understand before pursuing a leveraged purchase.
The debt must be non-recourse
Any loan used by your plan must be non-recourse - meaning the lender's only security is the property itself. You cannot personally guarantee the debt, and neither can any other disqualified person to the plan. Pledging personal assets as security for a plan loan violates the self-dealing rules under IRC Section 4975.
Non-recourse loans are available through a limited number of specialty lenders, as well as through seller financing or private lending from parties who are not disqualified persons. Because the lender carries more risk without a personal guarantee, terms are typically more conservative than conventional financing. Expect higher down payment requirements and reserves.
UDFI applies to IRA plans—but not Solo 401(k)s
When an IRA uses debt financing, the portion of income attributable to borrowed funds is classified as Unrelated Debt-Financed Income (UDFI) and subject to tax. This is a real cost, but it rarely eliminates the advantage of leverage. The tax applies only to the leveraged portion of income, deductions like interest and depreciation offset the taxable amount, and the net impact is typically modest relative to the return boost leverage provides.
The Solo 401(k) has a significant advantage here: it is generally exempt from UDFI on debt used to acquire real property. For investors who qualify, this exemption makes the Solo 401(k) the more efficient structure for leveraged real estate investing.