The Complete Guide to Self-Directed IRAs: Top 10 FAQs Answered
Directed IRA Podcast
Understanding Tax Traps with Self-Directed IRA Investments
Investing through a self-directed IRA may encounter tax hurdles, including Unrelated Business Income Tax (UBIT). UBIT applies when an IRA invests in a business generating ordinary income or leases personal property. Most common is the Unrelated Debt Finance Income Tax, triggered when an IRA uses borrowed funds for investments. This tax only applies to profits from the debt. Despite the tax implications, leveraging debt in real estate investments can boost returns. UDFI tax is around 20% on capital gains from debt profits, leaving 80% of the gains within the IRA. The key is to focus on the cash-on-cash return, as leveraging debt can amplify asset acquisition and returns, unlike traditional stock market investments. Considering the tax implications of UBIT is essential, but it should not deter investors from utilizing leverage to expand their retirement account's investment potential.
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