NUTS & BOLTS
TAX ISSUES
UNDERSTANDING THE INS AND OUTS OF UBIT HELPS IN DEVISING A DEBT-REDUCTION STRATEGY. TaxAdvantage
by Clay Malcolm
R
a tenant to pay off your IRA’s debts (and possibly provide additional cash flow) through rental income. You can com- bine the benefits of a loan with the tax-deferred or tax-free income rules associated with IRA accounts. Although the debt-leveraged percentage of your IRA’S net profits are subject to UBIT, utilizing a loan for your investment may ultimately allow you to realize higher profits than you could have without the loan. In regard to the short-term benefits, keep in mind that the non-debt-leveraged percentage of your IRA’s profits are not being taxed at all, due to the fact that profits from IRA contributions grow tax-deferred if it’s a traditional IRA, or tax-free if it’s a Roth IRA. Rental income can help reduce your debt ratio by accelerating your principal payments (via profit from rent) and, by extension, reduce the percentage of your profits that is subject to UBIT. The tax deductions associated with personal real estate investing (e.g. depreciation, mortgage interest, repairs, etc.)
eal estate is one of the more prominent investment choices for account holders of self-directed IRAs, as investors can translate pre-existing knowledge of the market to their IRA’s real estate investments. In order to devise the optimal investment strategy for your IRA’s property, it’s important to understand the short- and long-term benefits of utilizing a loan, and the mechanics of the UBIT (unrelated business income tax), a special tax applied to profits derived from an IRA loan. While UBIT may sound unappealing at first blush, it’s important for investors to do the numbers when it comes to the benefits of utilizing a loan in conjunction with the cost of UBIT. By understanding how UBIT affects your IRA, you may be able to develop a winning debt-reduction strategy that potentially maximizes your retirement savings. When you debt-leverage a real estate investment for your IRA, you can buy an investment property worth two or three times more than your current IRA balance, all while allowing
82 | think realty magazine | mar :: apr 2016
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