Entrust Learning Center > Recommended Reading > UBIT? You Bet! Using the Powerful Tool of Debt Leveraging in Your IRA

UBIT? You Bet! Using the Powerful Tool of Debt Leveraging in Your IRA

Many people just throw up their hands and say 'Forget it!' upon learning that an IRA can be subject to Unrelated Business Income Tax (UBIT) or Unrelated Debt Financing Income Tax (UDFI) if it owns debt leveraged property.

By: H. Quincy Long

IRA Insights

They are even more discouraged when they learn that any debt in an IRA must be nonrecourse to the IRA and to any disqualified person. This means that the lender must agree to look solely to the property as security for the loan, unless the property is acquired subject to existing financing.

However, being afraid of UBIT is short sighted and ignores the opportunity it presents for building massive wealth in your retirement plan. So why should you do something in your IRA that subjects it to tax? The answer is simple. You can do more with debt leveraging than you can without it. Yes, it means your IRA will have a silent partner (the IRS) with whom it will have to share the gains until it has enough cash to act on its own. But does that mean that you should ignore this powerful tool for building your retirement wealth? Absolutely not!

Here is a simple example to demonstrate the power of purchasing property with a loan. Assume that your IRA acquires a property with an average adjusted basis of $100,000, investing $20,000 in cash and getting an $80,000 non-recourse loan. Within 3 months, your IRA sells the property and nets $150,000 from the sale. After paying back the $80,000 loan, the IRA now has $70,000 (the original $20,000 plus $50,000 profit). At the end of the year, the IRA would owe a tax of approximately $12,796 (2003 tax rates), leaving an after tax profit of $37,204. That is an after tax return of 186% on the cash invested, and an annualized return of 744%!

A confused mind says no. Don't let it happen to you! To find out more about UBIT, please see IRS Publication 598 or your tax advisor. The information contained in this article is not intended to be tax or investment advice.

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