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IRA Investing: UBIT

Every now and again I hear a presentation that surprises me. This time it was by Richard Desich, who had an answer to what, for some investors, is a problem with their IRA investing: if the IRA buys property with debt, its income from the property is not ordinary IRA income, untaxed like other IRA income: suddenly it becomes subject to the "Unrelated Business Income Tax".

Why the law says that an instrument designed to make investments is engaging in unrelated business when it attempts to improve its return on an investment is a question best directed to your Congressman.

Desich's answer? Form a 401(k)plan, roll the IRA into the 401(k) plan (it has higher contribution limits anyway), and the UBIT tax does not apply AND YOU GET TO BE THE TRUSTEE OF THE PLAN (while with an IRA, technically you couldn't be that involved in its business).

Pretty interesting, eh? Any thoughts out there?

Posted by Arnold Williams on 05/22/2007 10:26 PM

Comments (6)

investment, pension

6 Comments on IRA Investing: UBIT

MAY

2007

I'm always amazed at the opportunities available for funding and yet the wierd approach by our goverment.

Thanks for the post...

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Arnold, as luck would have it I just posted a rather lengthy post regarding IRAs and real estate. And you are exactly right and I don't know why either! The non-depreciation I get. Same with the no interest deduction. But why you cannot use a debt instrument is beyond me.

Anyway, thanks for helping to get the word out on one of the shortcomings of this great strategy. People need to be aware.

MAY

2007

Matt -- You're welcome. I really don't understand why the government wants to make things more difficult in an arena where they do so poorly anyway.

Chris --http://activerain.com/blogsview/104168/Winning-Strategy-Using-Your is a GREAT post! Everyone should read it!

DEC

2007

Hi Arnold,

I always use my IRA Funds to invest in trust deeds, mortgages, tax lien certificates, etc., because these investments produce cash flow that is taxable as ordinary income. I purchase real estate in my limited liability company so that I can take advantage of the capital gain rates if I choose to pay the tax and the depreciation to shelter other cash flow.

JUL

Hi Arnold,

This is an interesting idea, however I don't think you can use a 401(k) to invest in real estate. As you suggested, you certainly can form a self-directed IRA in order to invest in real estate. Like you, I can't believe that the IRS applies the UBIT when using an IRA to invest in leveraged real estate. Thanks for the article.

Kyle Koller

AUG

Kyle, I believe you can invest in real estate with a 401(k) -- because I see organizations otherwise nervous about the advice they give accepting that real estate is an acceptable investment (see, for example, http://www.trustetc.com which has told some clients that the rules do not justify some of the business investments they wanted to attempt) . Now, particular 401(k) plans may not allow it: but it is always permissible to roll over to a different 401(k) plan that DOES allow it.

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