All Forum Posts by: John Bowens

Excellent comments above. It sounds like you are looking to use Traditional IRA money to purchase a rental property? If so, here are some thoughts to consider as you research further:

1) When your IRA or Solo 401k borrows money, it must be a non-recourse loan, and there are lenders out there that will loan to an IRA or Solo 401k, you just have to reasearch. The reason you have to obtain this special type of financing is because the tax code provisions (IRC 4975) do not allow you to personally guarantee debt that your IRA or Solo 401k takes on.

2) It was referenced above UBIT, which is a special tax on the portion of the after expenses and depreciation, that is attributed to the debt financed percentage of the property. Keep in mind, that is NET income, so with enough operating expenses, and depreciation, you might wipe out any income, and thus no UBIT, you will just need to run your numbers. Example, you purchase property for $150,000, and borrow $100,000, with $50,000 DP from IRA. 2/3 of the NET income will be subject to UBIT.
3) Now, what about a Solo 401k? Solo 401(k)'s in most instances are exempt from UBIT as it relates to Debt Financed Income. You might consider rolling your Traditional IRA over into a Solo 401k and purchasing a property with debt, instead of IRA. Now, here is the catch: 1) You have to have to be self-employed, maybe an LLC or S-Corp, or just sole prop, but you have to have earned income in that business. This means you are paying medicare social security tax on the income. You also can't have any W-2 employees, with the exception of you and your spouse, and maybe business partners that have at least 5% ownership.

You should work with a CPA or tax professional that can help you with structuring your business properly first. 

Hope this helps, great questions!!!!