Looking to Leverage Self Directed IRA for Initial portfolio

[George Vigil]

I didn't like the stock market volatility, so I decided to leverage my 401k proceeds to set up a Self Directed IRA to invest in Real Estate rentals.

I have $650k available and looking in the DFW, Jacksonville, Albuquerque and Colorado Springs markets for SFH or Multi Units.

My question is:

Should I purchase properties via cash or leverage financing and incur the UBIT taxes.

Are there any worksheets that help analyze real estate properties and factor in UBIT- Unrelated Business Income Tax?

Thank you for your insight.

George

[Brian Eastman]

George

There is no one-size-fits-all answer.

Leverage is a powerful tool for investors, and something one can do in self-directed IRA when investing in real estate.

The use of leverage increases risk/complexity. The mortgage needs to be paid whether there is a tenant paying rent or not, and it must be paid with the IRA. That means retaining some contingency reserves in the IRA, which most non-recourse lenders will require. The use of non-IRA funds (the borrowed capital) creates Unrelated Debt Financed Income which is taxable. The tax typically does not add up to much, but there is now the responsibility to keep books and engage a CPA to file a separate return for your IRA.

However, leverage can also significantly boost your cash-on-cash return on investment, so the extra complexity can be well worth it.

If you have already established a self-directed IRA, contact your plan administrator to see if they have any resources or guidance. Many - especially custodians who just act as passive processing agencies - may not and are limited by rule as to the amount of advice they can provide. If you are working with a quality provider of checkbook control plans, they may have more guidance resources for you. Ultimately, having a CPA on your team who is familiar with UDFI & UBIT is a good idea.