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IRA Financial Blog

Ultimate Way to Block UBIT for IRA Investors – Episode 379

Adam Talks

In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses how you can block UBIT which is a tax that affects certain Self-Directed IRA investments.

The Ultimate Way to Block UBIT for Self-Directed IRA Investors

The podcast explores the concept of Unrelated Business Income Tax (UBIT) and its impact on Self-Directed IRA investors. UBIT is a tax that applies to income generated from investments that are not connected to the exempt purpose of the account. Passive income categories such as capital gains, interest, dividends, royalties, and rental income are exempt from UBIT. The tax applies only to income that is not attributable or connected to the exempt purpose of an account.

Adam Bergman, founder of IRA Financial, suggests several ways to eliminate UBIT, including using a non-recourse loan to buy real estate or structuring investments as a loan instead of equity investment. A blocker C-Corp can also be used to eliminate UBIT, reducing the 37% tax to 21%. However, it is essential to note that there is no way to eliminate UBIT entirely. The podcast emphasizes the need for investors to be educated on the tax implications of triggering UBIT, as many investors are not sufficiently informed on the subject.

Bergman also discusses the parameters of investments, such as whether they generate losses or gains, if the loan will be paid off, or if it is a real estate asset. Self-employed individuals can get around the UBIT tax by setting up a Solo 401(k) and acquiring real estate through it. However, IRA and 401(k) account holders do not have this luxury, and if the loan is outstanding, they will get hit with UBIT if they have more than $1,000 in net income.

In conclusion, the podcast highlights the importance of understanding UBIT and its implications before making any investments. The best course of action is to structure investments in advance to reduce or hedge the costs, such as using a domestic C-Corp blocker, which is the best bet for most IRA and 401(k) investors. Being a client of IRA Financial gives access to tax professionals who can assist in navigating the UBIT rules and structuring investments that best take advantage of tax rules and exceptions.

To learn more, listen to today’s podcast!


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