Calculating UBIT on Real Estate Investments

When you consider the extraordinary potential tax savings you can enjoy by investing in real estate through a self-directed IRA and the recent volatility we’ve seen in the stock market, it’s not hard to see why so many investors have been flocking to alternative asset investments like real estate. However, self-directed investors should be aware of a few important matters before jumping headfirst into owning property in an IRA.

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Chief among these matters is unrelated business income tax (UBIT). One must consider how UBIT relates to property investments and how to estimate the potential impact of UBIT. Doing so can go a long way toward making an informed decision about IRA real estate investments.

How Do Real Estate Investments Generate UBIT?

For real estate investments, UBIT occurs on income earned from debt-financed, IRA-owned property. The amount of income subject to this tax is that which is directly attributable to the debt leverage. For example, if your account owns 50% of an asset and finances the other 50%, half of the investment’s earnings will incur UBIT.

How Can I Calculate UBIT?

There are other factors to account for in calculating the debt percentage, but don’t worry! New Direction Trust Company is proud to introduce our new UBIT Calculator to help you determine how UBIT might impact your current or prospective real estate investment. If you want to do the calculations yourself, we’ve included detailed steps on how to do so.

UBIT doesn’t have to be complicated and it doesn’t have to deter you from making lucrative real estate investments. In many cases, UBIT is a simple business expense that does not jeopardize the tax-advantaged returns a property can generate.

Explore the UBIT Calculator to learn more about UBIT and how it may impact your real estate investments. For any other questions or concerns related to your self-directed accounts, please feel free to give us a call at 877-742-1270 or send us a message through the Client Portal.

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