Avoiding Hidden UBIT Taxes in Leveraged Real Estate in a IRA

Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Dmitriy: Hello and welcome to today’s REI Classroom show. My name is Dmitriy and today’s topic will be how to avoid the hidden UBIT tax on leveraged real estate inside an IRA.

Mike: This REI Classroom real estate lesson is sponsored by uglyopportunities.com.

Dmitriy: If you consider yourself a sophisticated investor then you probably know that you can use your retirement accounts to acquire real estate and do other nontraditional investments. In order to do that, you do need to have a self-directed IRA because with a conventional retirement account that you might have at Schwab, Fidelity, Wells Fargo, your investment options are limited by the custodian and they’re confined to the stocks, bonds and mutual funds.

So in order to open up those investment possibilities, you need to switch to what’s called a self-directed custodian. There is a number of them out there and they don’t limit your investment options. And one of the most popular options with self-directed IRAs are real estate. And also, again, if you are a sophisticated investor you might know that you don’t have to pay all cash for the property. You can actually purchase property using leverage, using financing.

However, conventional financing is not allowed inside of a retirement account. You have to use a nonrecourse loan. And when you do that inside of IRA, the income portion that comes from the finance portion of the property will be subject to UBIT tax, which stands for unrelated business income tax. And its tax is about 40%, just under 40% so it is pretty high.

So how can you avoid that tax on leveraged real estate? Well, you do that with a truly self-directed solo 401(k) plan. A truly self-directed solo 401(k) plan is designed for those people who are self-employed or own a small business without full-time employees. And this plan is actually exempt from UBIT tax on leveraged real estate. So when you use a self-directed solo 401(k) plan and buy real estate in the plan, the income that is derived from the finance portion of the property will not be subject to UBIT.

So just another reason why to use a solo 401(k) plan to invest in real estate, because you’re not paying a tax on leveraged real estate. This is just one of the many advantages of the solo 401(k) if you have not talked about this, the most powerful investment vehicle for real estate investors and for self-employed people. You owe it to yourself to investigate this option because it offers many, many great advantages that are much better than self-directed IRA. That’s my tip for today and I will see you on the next show.

Mike: HomeVestors, the “We Buy Ugly Houses” folks, is a franchised system of hundreds of real estate investors that have purchased over 65,000 houses. If you’d like to learn more about the most powerful real estate investing system in existence, whether you’re a pro looking to take your business to the next level or whether you have no experience at all, but a burning passion to be successful in real estate investing, please visit flipnerd.com/ugly to learn more.

Please note, the views and opinions as expressed by the individuals in this program do not necessarily reflect those of flipnerd.com or any of its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions, as real estate investing can be risky.

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