Best Investment Vehicle for Self Directed IRA

[Ezra Nugroho]

Real Estate is certainly a great vehicle to invest because of the various tax benefits associated with it. However, if you invest with pre-tax money, some of those rules may not apply, for example depreciation tax write-off. I know many people buy real estates with their IRA money, but I have heard someone told me that it's not the best vehicle. I also know from experience that it's pertinent to keep ample cash reserves while investing in RE for unexpected repairs, etc. This means that someone should not buy the most expensive property they can afford with SDIRA, but maybe only at 80% IRA worth and 20% reserve. But this means that you are not fully invested, not all of your money is working. I am certainly novice in this area, and would love to learn more.

What would you consider to be the best SD-IRA investment vehicle with it's tax implications? Common paper assets, stocks, mutual funds? Buying rental properties? Performing notes/private lending? Non performing notes? Empty land for long term appreciations?

What would you recommend if your IRA is worth 20k, or 100k or 1M?

Thanks in advance!

[Brian Eastman]

@Dennis Weber

UBIT is simply a tax that applies to a tax-exempt entity when it engages in a trade or business on a regular or repeated basis. These activities do not jeopardize the IRA's status as a prohibited self-dealing transaction would. The tax is simply a device congress came up with well before IRA's even existed to level the playing field when tax-exempt entities compete with taxpaying businesses.

Passive income is not taxed, and would include things like interest, dividends, royalties, and rents from real property.  Flipping or wholesaling properties is considered such a business activity and if done with any regularity, subject to UBTI taxation.

Contrary to the views on many on BP, this is not a reason to avoid outright transactions that may have exposure to this tax. Just look at the net after-UBTI returns and compare them to other investments the IRA may make. If I can get 3-8% in the market, 8-10% as a landlord and 12-15% in hard money lending or tax liens, but can generate > 20% after UBTI flipping houses, I'll flip houses. Investing is just math, pure and simple.