The Complete Guide to IRAs and IRA Investing: Wealth-Building Strategies Revealed by Martha Maeda

Author:Martha Maeda
Language: eng
Format: epub
Tags: IRA, IRA Investing, investments, wealth-building tool, retirement, contributions, taxes, saving, finance
Publisher: Atlantic Publishing Group
Published: 2013-04-11T00:00:00+00:00

Unrelated Business Income Tax (UBIT)

Income from property an IRA purchases with a mortgage is subject to the UBIT, originally conceived for charities that make money from businesses unrelated to their central purpose. It is reported on IRS Form 990T and further information is available in IRS Publication 598 (www.irs.gov/pub/irs-pdf/p598.pdf ). Income from the portion of the property the mortgage finances that exceeds $1,000 is taxed at the trust rate. If the amount of the annual tax will exceed $500, quarterly estimated payments should be made. When the property is sold, the UBIT will apply to the capital gains if the investment has been associated with debt any time during the 12 months preceding the sale. The best way to avoid this is to pay off the mortgage at least 12 months before selling the property.

UBIT is payable on investments in a Roth IRA.

UBIT applies to any property an IRA owns and purchased with a mortgage, whether it is traditional IRA or a Roth IRA.

Disadvantages of Owning Real Estate in a Self-Directed IRA:

• The strict IRS rules regarding real estate that an IRA owns mean some of the benefits that investors in real estate normally enjoy are not available to IRA owners.

• The tax deductions usually available for real estate cannot be taken for real estate an IRA owns.

• An IRA owner cannot use a house the IRA owns as a primary residence, vacation home, or business site. The property cannot be rented to a parent, grandparent, child, or member of an immediate step-family.

• An IRA cannot purchase property previously owned by family members.

• The IRA custodian, not the IRA owner, must buy the property and will charge a fee for this service. Custodians’ fees vary widely.

• The IRA must pay all the expenses associated with the property, including maintenance and property taxes. Enough cash must be available in the IRA to cover these costs.

• The regulations governing ownership of real estate in an IRA are complicated, and the penalty for breaking them is severe.

• When you begin taking RMDs from a traditional IRA, it may be difficult to generate the exact amount needed each year for the distribution. It may become necessary to sell some of the property your IRA owns and invest in other assets to meet your RMDs.

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