Self directed IRA, UBIT & Subject-to financing on properties

6 Replies

I have an opportunity to buy a property where the sellers are willing to keep their bank loan in place. I'm thinking of buying it with my self-directed IRA. Has anyone does this before? I have done many transactions in my IRA, but nothing with a loan on the property. I'm unfamiliar with how UBIT comes into play in this specific situation and if their would be a problem because the loan is in neither my name ot the IRA'a. Any help would be appreciated.

@Maureen Jacobson

When an IRA uses debt financing, Unrelated Debt Financed Income is generated and taxed. This UDFI is a subset of UBIT (unrelated business income tax) and documented in IRS Publication 598.

Confer with your licensed tax advisor for specific details.

The general guideline is that the impact of such taxation on the operating income from rents is usually pretty low. The percentage of the income derived from debt-financing is taxed and you get to use the same percentage of normal write-offs like depreciation, interest payments on the note, etc. to reduce the tax amount. You will definitely see a higher cash-on-cash return to the IRA when using leverage, even with the tax cost and the cost of having a 990-T return prepared for your IRA.

If you sell the property with debt-financing still in place, the tax bite can be larger, but you should still come out ahead by using leverage.

@Mark Nolan, isn't the loan already non-recourse to the buyer (ira) since it's in the name of the seller? I wanted to clarify your comment that the loan "needs to be converted" since I was thinking of doing something similar.