IRA UBIT with Comm Real Estate

[Art Webb]

If I buy multi family comm real estate via a RE LLC company with my Roth IRA does the rent income become UBIT taxable ? If the property is paid in cash and later a mortgage is secured does it impact the UBIT question above ? Thank you for your feedback !

[Joshua Thompson]

Hi Art, when buying real estate in a Self Directed IRA it's typically recommended the property is paid in cash and holds no debt. If there is debt on the property you run into the debt-financed property issue which can cause the rent to be treated as UBIT and be subject to the trust tax rate which increases to 37% extremely fast.

[Brett Synicky]

Quote from @Art Webb:

If I buy multi family comm real estate via a RE LLC company with my Roth IRA does the rent income become UBIT taxable ? If the property is paid in cash and later a mortgage is secured does it impact the UBIT question above ? Thank you for your feedback !

It's true that the IRA will incur UDFI/UBIT on the income derived from the same % leveraged. What's also true is that you can deduct expenses and even depreciation on this same % and subtract the first $1000 before calculating the UBIT. It's true it does scale up to 37% but not until around $12k of income after those deductions. Generally in the first year or more you'll have enough of those to not really incur any UBIT on especially when you factor in cost seg. Don't let UDFI on leveraged real estate scare you away from investing in your IRA, it can still make you a lot of retirement money.

Even better, get some self employment activity and sponsor a solo 401k then no UBIT on leveraged real estate!   

[Account Closed]

Hey Art, 

When investing in real estate within a Self-Directed IRA, using leverage can trigger Unrelated Debt-Financed Income (UDFI), which may lead to Unrelated Business Income Tax (UBIT) on the portion of income derived from the leveraged percentage. While it's true that UBIT can scale up to 37% rapidly, this typically occurs only after $12,000 of income, and you can deduct expenses, including depreciation, against the leveraged portion, subtracting the first $1,000 before calculating UBIT. In the initial years, cost segregation and other deductions can often offset much of this tax, so UDFI shouldn't deter you from real estate investing within an IRA, as it can still be a lucrative retirement strategy. Alternatively, if you have self-employment income, consider sponsoring a Solo 401(k), as it exempts leveraged real estate from UBIT altogether.

[Art Webb]

Appreciate all the information and advice.  Like the Solo 401K idea but at 71 yrs a little too late to start a business and earn enough salary to grow a Solo 401K for a real estate purchase.

[Andrew Strauss]

Yes Art, you will be subject to UBIT to the extent of debt taken as compared to the property value. Example, if you mortgage 50% of the property value, 50% of your income could attract UBIT.

[Art Webb]

Quote from @Brett Synicky:

Quote from @Art Webb:

If I buy multi family comm real estate via a RE LLC company with my Roth IRA does the rent income become UBIT taxable ? If the property is paid in cash and later a mortgage is secured does it impact the UBIT question above ? Thank you for your feedback !

It's true that the IRA will incur UDFI/UBIT on the income derived from the same % leveraged. What's also true is that you can deduct expenses and even depreciation on this same % and subtract the first $1000 before calculating the UBIT. It's true it does scale up to 37% but not until around $12k of income after those deductions. Generally in the first year or more you'll have enough of those to not really incur any UBIT on especially when you factor in cost seg. Don't let UDFI on leveraged real estate scare you away from investing in your IRA, it can still make you a lot of retirement money.

Even better, get some self employment activity and sponsor a solo 401k then no UBIT on leveraged real estate!   

[Art Webb]

Follow up Question……when the property is sold the proceeds go into the Roth IRA but is their also UBIT on the sale proceeds ?

[Brett Synicky]

@Art Webb yes there is.  Unless the loan paid off free and clear for at least 12 months. 

[Art Webb]

Quote from @Brett Synicky:

@Art Webb yes there is.  Unless the loan paid off free and clear for at least 12 months. 

Thank you again !  Art

[Ashish Acharya]

Yes, rent income from real estate bought through your Roth IRA can trigger UBIT. If you later get a mortgage, it may also trigger UDFI, making a portion of the income taxable under UBIT.