Using a non-recourse loan to buy real estate inside an IRA creates Unrelated Debt-Financed Income, taxed under UBIT even though an IRA is normally a tax-advantaged account.
How it works
The loan balance divided by the property’s value gives the debt-financed percentage. That percentage applied to net income gives the taxable UDFI, which is then taxed at the applicable trust tax rate.
What this does not include
This does not include the $1,000 UBIT filing threshold, the small standard deduction available against UBTI, or how the debt-financed percentage should technically be averaged over the 12 months before a sale for capital gains purposes.
How to use this calculator
- Enter property value, loan balance, net income, and the applicable tax rate.
Frequently asked questions
Does UBIT apply to an all-cash IRA real estate purchase?
No — with no leverage, there’s no debt-financed income, so none of the rental income is subject to UBIT.
Does UBIT reduce the IRA’s overall tax advantage entirely?
No — only the debt-financed portion of income is taxed; the portion attributable to the IRA’s own cash investment remains tax-deferred or tax-free as usual.
Who pays the UBIT — the IRA or the account owner?
The IRA itself files Form 990-T and pays any UBIT owed directly from IRA funds, not the account owner personally.
