Congress created IRAs so you could invest for your retirement. The benefit of an IRA is that all earnings are tax deferred or in the case of a Roth IRA tax free.
There may be times when an investment opportunity comes along that requires more money than you have available in your IRA account. In this case your IRA may borrow (use leverage) to complete the transaction.
The rules for using borrowed money in your IRA are:
1. Non-Recourse: The loan must be made to the IRA and not to you. You may not co- sign for the loan. This is sometimes called a non-recourse loan.
2. UBIT: That pro-rata portion of any profit an IRA earns due to the use of leverage is taxable income to your IRA.
Example:
Your IRA buys a $100,000 house.
The IRA uses $70,000 of its own money and $30,000 of borrowed funds.
Your IRA sells the house for a $45,000 profit. Because 30% of the earnings came about because of the use of borrowed money, 30% ($13,500) of the earnings are taxable income to the IRA as Unrelated Business Income Tax (UBIT). The 70% that was earned using IRA dollars remains tax deferred.
3. UBIT tax filing: If your IRA has income generated due to borrowed funds your IRA must file an IRS Form 990-T. You are responsible for filing the Form 990-T, and not the IRA custodian file this form)
The reality of using leverage in your IRA:
1. Interest rates can be a higher because the loans are non-recourse.
2. UBIT is computed at the “Trust Income Tax Rate” which scales up faster than the Individual Income tax rate.
For more information on Self Directed IRAs call toll free 888-795-7950
- To visit our Home Page go to Self Directed IRA
- To attend a Free Webinar go to Self Directed IRA Webinars
- To see what our client say go to Testimonials
- Submitted by Dennis Blitz, The IRA Club
IRA Club, 333 N. Michigan Ave Suite 2220, Chicago, IL 60601
