Unrelated Business Income Tax - UBIT for Solo 401(k) & IRA accounts June 26, 2008
Posted by Jeff Nabers in Self Directed IRA/401k, real estate.Tags: 401k, ira, leverage, mortgage, real estate, self directed, tax, taxation, taxes, UBIT, UBTI, UDFI, unrelated business income tax, unrelated business taxable income, unrelated debt financed income
10 comments
If you talk to the average CPA, he’ll tell you that UBIT is the boogeyman and is to be avoided… always. Discussing this topic with an above average CPA (such as Eric Wikstrom of Integrated Wealth Strategies) yields different advice.
The Two Types of UBIT
- Triggered from a trade or business - if a tax exempt entity (such as an IRA or 401k) owns a trade or business, the income of that business is taxed at trust rates (i.e. very high tax rates). Both IRA & Solo 401k accounts are subject to this type of UBIT.
- Triggered from ownership of leveraged real estate - if a tax exempt entity (including IRA) owns real estate leveraged with a mortgage loan, the portion of that income attributable to the mortgage loan is taxed at trust rates. This type of UBIT is specifically referred to as UDFI - Unrelated Debt Financed Income. Solo 401k accounts & other qualified plans are exempt from UDFI.
Trust tax rates are very high, so it might make sense to avoid Type 1 UBIT at all costs. On the other hand, a close examination of UDFI tends to revoke its “boogeyman” status.
The reason UDFI isn’t a detrimental cost is that non-recourse mortgage loans (the only type an IRA/401k can legally obtain) are typically only offered at a 65% loan-to-value maximum. So this means that the UDFI tax is only payable on up to 65% of the property’s net income. (That’s right - net income. You do get to deduct depreciation and other expenses before paying UDFI tax).
Let’s examine a simple comparison of the taxes payable on net real estate income with 50% leverage: (more…)
Self Directed IRA/401k vs. 1031 and other conventional RE tax strategies June 24, 2008
Posted by Jeff Nabers in Self Directed IRA/401k, real estate.Tags: investment, self directed, 401k, real estate, invest, investing, income, tax, investor, taxes, gain, defer, 1031, like kind, exchange, retirement account, ira inflation, performance, depreciation, strategies
2 comments
Conventional Tax Strategies for Real Estate
Many real estate investors boast of their tax strategy as involving one or more of the following:
Depreciation - This is a tax concept where the property owner pretends that his property is decreasing in value. For residential real estate, it assumes that the property’s improvements will become worthless over 27.5 years. In commercial real estate, the calculation is for 39 years. During each year of property ownership, the owner can take that year’s pro rata depreciation as if it is a loss against the income of the property… which reduces the taxable income of the property, thus reducing the amount of taxes due. Upon future sale of the property, depreciation normally must be “recaptured” which means that there is no more pretending, and the taxes on the truly realized gains must be paid anyways.
Cash out Refi - This is where the owner of the property will refinance the mortgage. The new loan will have a higher balance than the old one, resulting in “cash out”. Because this is just borrowing, it is not a taxable event. Upon future sale of the property, however, taxes will normally be due on the actual gains anyways.
1031 Exchange - Upon the sale of real property, the gains can be deferred if they are used to purchase property of “like kind” within a certain time period. It goes something like this:
- Sell Property A
- Have a “qualified intermediary” receive the proceeds of the sale
- Replacement property (”Property B“) must be identified in writing within 45 days of the sale of Property A
- Property B must be purchased (closed) within 180 days of the sale of Property A
- Property B must be of equal or greater value to Property A
- Both properties must be “like kind”. For instance if Property A was U.S. real estate, Property B must also be U.S. real estate.
So, savvy real estate investors often (more…)
30 Day Challenge: Can you do without TV? June 22, 2008
Posted by Jeff Nabers in Health, Personal Enjoyment, Personal Productivity.Tags: addiction, magazine, movies, news, newspaper, productivity, sitcom, television, TV
5 comments
I do a lot of things differently in an effort to enjoy my life. Sometimes I forget just how abnormal some of them are. This past week I co-instructed the IRA Association of America professional member enrollment course in Denver, CO. During a lunch conversation, one of our new members asked me what my secret is to accomplishing so much so rapidly. I half jokingly explained that I don’t watch TV. I guess this type of statement is more unbelievable than I had thought because a couple of hours later he still couldn’t believe it: “You really don’t watch any TV at all?”
“I don’t own a TV,” I explained. “I occasionally watch DVDs on my projector.”
I don’t watch TV for two reasons:
Mental & Physical Health - I believe that everything that goes into my body or mind becomes part of me. Turning on the TV means that I can choose to watch what’s available from a menu, but only if I also watch other things which I have no control over - commercials. Our thoughts create our reality. Having others’ thoughts shoved into my brain means letting other people create my reality.
Time - I want to enjoy my life. Every second is a decision. When I pit TV against snowboarding, snow skiing, wakeboarding, water skiing, bicycling, car racing, motorcycling, playing musical instruments, and traveling to new places… TV always loses. To afford some of these activities (more…)
Filing Deadlines: 5500-EZ & 990-T June 16, 2008
Posted by Jeff Nabers in Self Directed IRA/401k.Tags: Solo 401k, self directed, ira, 401k, UBIT, irs, filing, form, deadline, UBTI, UDFI, unrelated business income tax, unrelated business taxable income, unrelated debt financed income
1 comment so far
5500-EZ for Solo 401(k) plans
If your Solo 401(k) plan assets exceeded $250,000 in value in 2007, a 5500-EZ must be filed by July 30, 2008. This is an informational return used to report plan value to the IRS and does not require any tax payment.
990-T for IRAs with mortgage financed real estate
If your IRA owns mortgage leveraged real estate, a form 990-T should have been filed with UBIT payment by April 15, 2008. Unrelated Business Income Tax is one an IRA must pay on the portion of income or gains attributable to the mortgage leverage used. For example, if your IRA owned a property with a 50% debt to basis ratio, then 50% of its income would be taxable at trust rates. While many investors balk at the idea of paying taxes on IRA profits, a tax analysis in most scenarios typically favors paying UBIT over making the same investment with non-retirement funds.
How the little guy can profit from $4 gas June 11, 2008
Posted by Jeff Nabers in Self Directed IRA/401k.Tags: profit, energy, savings, spending, gas, prices, saving, solar, panel, power, gallon, technology, sprawl, suburban sprawl, commute
2 comments
It’s everywhere: GAS PRICES! ENERGY CRISIS!
However, this blog post is different. Turn on the tube to CNN and hear about how “We’re trying very hard to find a viable source of alternative energy to reduce our dependency on oil.” Personally, you can simply buy an electric car (right now). Those savings can be significant, but they can only go so far for your finances. Besides saving money, consider making money off of $4 per gallon gas. Assuming you don’t own Exxon or BP, here are some ideas:
The Contraction of Real Estate Demand - Sprawl Reversal
In this instance I don’t mean “contraction” in terms entire real estate markets losing value, I mean “contraction” in the sense of density. Before recent gas prices started changing the world, suburban sprawl was rampant in the U.S. The easy to obtain mortgage financing provided by the growth of the housing bubble only multiplied sprawl. In cities across America, middle class people found themselves moving to the outer suburban areas where they could have a 4,000 square foot house with a 3 car garage. They were all sipping lemonade on their huge front porches, admiring their white picket fences, and trading stories about flippers and spec homes just before getting sucker punched by gas prices and their rising Adjustable Rate Mortgage payment.
As the “look I’m rich, I swear!” house of cards finally fell, many middle class Americans are finding themselves in one of two categories: (more…)
What’s so special about the IRA LLC? June 9, 2008
Posted by Jeff Nabers in Self Directed IRA/401k.Tags: self directed, ira, custodian, prohibited transaction, llc, ira llc, irs, compliance, limited liability company, minutes, operating agreement, special purpose, compliant, facilitator
4 comments
Ahhh… the single most mis-answered question in the self directed IRA world:
Customer: I’ve noticed it costs more to setup an IRA LLC than it does a general purpose LLC. What’s so special about the IRA LLC?
LLC Facilitator: The Operating Agreement has special language. Putting together an IRA LLC without this magical language will result in a prohibited transaction and hefty taxes.
This is untrue. While it’s advisable to include special language in a special purpose LLC (one that is intended to be owned by an IRA and managed by the IRA accountholder), the absence of such language will not create a prohibited transaction in itself. Believe it or not…
Any newly created LLC can be used with an IRA!
…without necessarily creating a prohibited transaction. The sales pitch that you need the special purpose operating agreement is bogus.
That said, it is still advisable to have an IRA LLC established for you by a company experienced and competent in such facilitation. Not because you have to, but because you should want to. Why?
You want things to look good in the event of an IRS audit
This is probably the main reason why you should have an IRA LLC formed for you by a specialist instead of doing it yourself. If you get audited, the IRS is going to have a first impression about your IRA LLC structure. If it looks like you did everything compliantly and your documents pro-actively address most compliance issues, the IRS’s first impression may be friendly. If it looks like you just threw the LLC together with little regard for compliance, this may negatively affect the IRS decision of how long and excruciating the whole ordeal will turn out to be. This is an important issue. Notice I said “looks like”. Regardless of how compliant you are, (more…)
Self Honesty: Stock Market Strategies Worth Considering June 6, 2008
Posted by Jeff Nabers in Self Directed IRA/401k.Tags: 401k, call, crash, crisis, fund, going long, hold, holding, home builder, index, inverse, investing, ira, lender, loss, mortgage, mutual fund, options, position, profit, put, risk, self directed, selling short, short selling, stock market, subprime, trade, trading
1 comment so far
While I generally avoid mutual funds like the plague, I don’t avoid the stock market altogether. I’ll split what I do in the stock market into two categories: long and short. Either way, I’m honest with myself in admitting that no matter what I do in the stock market, it will be speculative and risky.
Long
“Going long” means buying a stock and expecting its price or income to rise so I can sell later for a profit. There are millions of people who have access to the same information as you, and that is generally reflected in the price of that stock. If you know something non-public about the company, trading it may be illegal for you. I’ve bought individual stocks before; I just treat the situation honestly; it is speculative in nature, and I only make such trades with very small portions of my portfolio.
I don’t go long on mutual funds because I don’t know what I’m going long on. It is virtually impossible to know what I’m actually investing in when I buy shares of a fund.
Short
Selling Short… A short position is the opposite of a long one. Instead of buying low and selling high, selling short is a matter of selling high and then buying low. For me to do this, I borrow shares of a stock and simultaneously sell them at the market price in expectation of a price decrease. To close this position later, I just have to buy back shares of the same stock at the then market price and pay back the borrowed stock. If during my position the stock price declined, I profit; if the stock price increased, I have a loss.
Ex: ABC Company seems to be doomed. It’s currently trading at $50, but I think it will go much lower over the next couple months. I sell 100 shares short. This means I borrow 100 shares and simultaneously sell them for $5,000. A few months later I see the stock price has declined to $35. To close my position, I buy 100 shares back for $3,500. I pay back the borrowed shares and retain the $1,500 profit, less fees and commissions.
I like short selling more than going long. I often notice (more…)
Stock Market Profits: Luck, Insider Trading, Arbitrage, Big Fish, and Geniuses June 5, 2008
Posted by Jeff Nabers in Self Directed IRA/401k.Tags: self directed, ira, 401k, invest, investing, mutual fund, mutual funds, arbitrage, arb, insider trading, big fish, luck, lucky, speculate, speculative, warrenn, buffett, genius
2 comments
Luck… Doing very well in publicly traded securities is sometimes a streak of good luck. I’ve had a terrific run on the craps table in Vegas many times. Eventually, I run out of good luck. Many people experience the same thing with trading.
Insider Trading… This is when a person has non-public information on which he bases a trade in a public securities market. It is illegal. Insider trading in public securities can lead to imprisonment. Insider trading in real estate and private investments can lead to extraordinary profits.
Arbitrage… This is the act of profiting from the mispricing of assets. When an ounce of gold costs $900 in New York and $895 in Japan, “arb” traders will buy lots of gold in Japan and immediately sell it in New York… theoretically risk free. When dealing with transaction costs, arb trading typically requires (more…)
Saving vs. Investing vs. Surrendering June 4, 2008
Posted by Jeff Nabers in Money, Self Directed IRA/401k.Tags: self directed, ira, 401k, investing, inflation, fund, saving, surrendering, mutual
1 comment so far
Has your saving really been a loss? Has your investing really been saving? Let’s find out. To start, here are my definitions…
Investing - the placing of assets to build wealth in a way where overall return can be maximized and risk minimized confidently, competently, and consistently.
Saving - the act of reducing spending in an effort to accumulate wealth.
Surrendering - the placing of money into a situation where you have little to no understanding of where your money actually went… and thus little or no control of what happens to it.
Building on that, my philosophy of wealth building contains 4 simple truths:
- Investing primarily in the stock market is only possible on a large scale (like Warren Buffett) or with nonpublic information. The latter is illegal and can result in imprisonment.
- In the current inflationary environment, saving US dollars results in a loss of wealth… even in a CD or money market fund.
- The average person’s investable assets are inside retirement accounts, such as IRAs or 401(k) plans.
- The average person cannot invest until they restructure their retirement accounts to have unrestricted investment options.
What you’ve called investing may have actually been saving and surrendering under my definitions.
Investing into a stock may be (more…)
Feedburner Subscribe
