If you invest through an IRA in a real estate deal that borrows money to buy the asset, taxes such as UBIT or UDFI can come due inside the IRA itself. The bill usually has to be paid with cash already in the account, not from your checking account. If the property is hard to sell and the IRA does not have enough cash, that can create real problems.
The same question comes up with other holdings: if you’re going to invest in something like Kraken, or in an apartment complex, should that money come from a taxable account, an IRA or a Roth IRA? Talk through the structure with a tax advisor before you decide where the asset belongs. This is general information, not tax advice.
Key points
- A leveraged real estate deal inside an IRA can trigger taxes such as UBIT or UDFI.
- That tax bill generally has to be paid with cash inside the IRA, not from a personal checking account.
- If the asset is illiquid and the IRA is short on cash, you can be forced into a difficult sale.
- Choose the account type with a tax advisor before you buy.
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