We recently received a question in an email from Wayne that is asked often, so we thought we would post the question and our answer.
Question: I’m interested in the software but I don’t understand what is included in the IRA module that would make any different than just looking at the pre-tax impact using the regular software. Isn’t the only difference in using an IRA to invest in real estate is that there is no income tax on earnings?
Use the IRA Module to Compute UBIT
Answer: Thank you for your email. Owning real estate in an IRA can subject the rental income generated by the IRA to the Unrelated Business Income Tax (UBIT). That means your IRA may need to file a tax return and pay the computed tax. Our software calculates the projected income tax (if applicable). This means you are able to compare a real estate investment with owning it personally (and paying taxes) or owning it in your IRA and paying the UBIT.
UBIT will only come into play if you leverage (borrow money). If you do not borrow money, then you need only use the “before-tax” analysis. However, If you do not use leverage when investing in real estate, your rate of return can be negatively affected. In other words, that is why investing in real estate can be so lucrative. As an example, leverage is simply taking the bank’s 6% ‘money’ and making 15% on it.
Why would you be willing to pay UBIT? Would you buy a great rental property investment if you had to pay individual taxes? Of course you would. So why would you do anything different with your IRA?
The key is to be able to calculate the potential impact of UBIT. Individual taxes and UBIT are different in how they are calculated.
© 2019 Douglas Rutherford, CPA, CGMA, CPLA. All Rights Reserved. Douglas Rutherford is a nationally recognized CPA practicing in the real estate industry. He is the founder of Rutherford, CPA & Associates, and the President and CEO of RentalSoftware.com. He is also the developer of the national leading real estate investment analysis software, the Cash Flow Analyzer ® & Flipper’s ® software products. Doug earned his Masters of Taxation degree from Georgia State University, Atlanta, GA.