Real estate can be an attractive investment, particularly when securities markets are volatile. However, individuals who hold debt-financed property in a non-qualified plan should be aware that doing so might trigger unrelated business income tax.
If you are an individual investor or trustee of a self-directed IRA (SDIRA) or other non-qualified retirement plan, BeachFleischman PC can help determine whether your investments are creating unrelated business taxable income (UBTI).
What Is Unrelated Business Taxable Income (UBTI)?
When a non-qualified plan invests in a real estate partnership, any debt-financed portion of the property’s income is considered unrelated business taxable income (UBTI).
In addition to the added tax, some individuals can face early withdrawal penalties if their custodian or trustee decides to exclude the real estate partnership from their portfolio and distributes the amount of the investment using a Form 1099. Investors in SDIRAs also must steer clear of prohibited transactions, which include any activities that benefit the investor or his or her linear family members or related entities.
The Right Accounting Firm Can Help
Ignoring UBTI can create a heavy tax burden when the IRS spots that oversight. Before using IRA funds to purchase real estate, you need to thoroughly understand your options and the potential tax implications.
The tax advisors of BeachFleischman PC have helped many investors and trustees minimize or avoid the unrelated business income tax and maintain compliance with the rules by:
- Determining exposure to unrelated business income tax
- Recommending entity structures that mitigate tax exposure and avoid prohibited transactions
- Filing Form 990-T to report unrelated business taxable income
- Accumulating losses that will be used to offset future income
If you have questions about the pros and cons of using a non-qualified retirement plan to purchase real estate, please contact us via the submission form below.