Entrust New Direction Blog

10 Million Americans are enrolled in Health Savings Accounts as of January, 2010, according to a new poll released by America's Health Insurance Plans.  10 million Americans with an HSA represents an increase of 25% in one year, with big increases in large group coverage (33%) and small group coverage (22%).

According to the report, Colorado was among the highest percentage of HSA users by state with 9.2%.

Considering the economy, many small businesses are choosing HSAs to save on healthcare costs for employees and the compnay itself.  Any healthcare change can be difficult, but many employees have discovered their HSAs can be as good as, or better than, their previous health care.

Many of the 10 million have discovered that they can use an HSA to save for future health expenses after they retire. Self-directed HSAs can provide a unique investment opportunity in the healthcare arena. Anyone with a self-directed HSA can invest the funds in real estate, precious metals, or many other investment alternatives. If the HSA holder has investment success, the funds will be tax-free to pay for qualified medical expenses.

HSAs can be used as an investment tool, or just as a savings account and tax break.  Especially with the healthcare overhaul, HSAs will continue to provide many options for Americans in all tax brackets.

We are hearing from numerous retirement investors who directed their Qualified Plans to purchase a wide variety of non-traditional investments, but are meeting resistance in converting those assets to a Roth IRA. These Qualified Plans run the gamut of available types, from defined contribution plans such as 401k plans, to profit-sharing plans, to money purchase plans, to defined benefit plans. Many of these plans have accumulated significant assets, including real estate. In order to take advantage of the 2010 Roth conversion opportunity,  these assets must be distributed from the plan to a Roth.

Entrust New Direction focuses on this particular process. Recently, many individuals have come to us because they want to move assets out of company plans and into IRAs as they reach retirement age. Unlike most IRA providers, we are happy to help get those assets moved.

With the 2010 changes, more individuals are looking to move their assets to a Roth IRA, thus locking in the tax rates at the current (some say low) tax rates, while at the same time getting tax-free income for the future. If you find yourself wanting to convert non-traditional plan assets to a Roth in 2010 and lock in the current tax rates, we can help!

The conversion process:

•  Open a new Self Directed Roth IRA with Entrust
  
•  Determine the value of the asset(s) and initiate a direct rollover from the old plan to the new Roth
•  Include the value of the asset(s) rolled on their individual tax return either in 2010 OR ½ in 2011 and ½ in 2012. (You will receive a 1099R with the value listed)
•  The asset(s) would then be owned by the Roth IRA and would be tax-free from that point forward.

A Self-Directed Roth IRA is only different from any other Roth in that it can hold a much wider variety of assets.

Consult with your tax advisor for what the tax implications are and ask your plan administrator what your options are for moving assets out. If either of your experts or you have any questions, we would be happy to share the rules and details. Call us today to get the process started.

We field quite a few calls from ‘creative' investors scheming to get around the IRS rules for self-directed IRA investing. As somebody that takes a lot of these calls, I am often surprised by the lack of respect that the IRS gets from the average US tax payer. I understand that very few people have ‘warm and fuzzy' feelings about the IRS; I mean it is pretty rare that a surprise contact by the IRS is a good thing! So I understand the distaste with the IRS, however I think people should be careful not to confuse dislike with a lack of respect.

("tax collector" photo by eflon)  

The fact is, the IRS is pretty darn good at what they do once they open an audit. IRS audits are extremely thorough. If you break a rule and your IRA is audited you are probably going to get busted and the penalties can be extremely damaging to your IRA. On top of that, unlike within our Judicial System, the accused is guilty until proven innocent - not the other way around. The burden of proving innocence falls on the accused taxpayer.

The IRA prohibited transaction rules can be found section 4975 of the IRS code. In respect to buying real estate within an IRA the rules are you (and your direct lineal relatives) cannot use the asset that your IRA owns. Additionally, your IRA cannot have transactions (buy/sell) with you or your direct lineal relatives. These rules are pretty cut and dry and there is no legitimate way to get around them. If your IRA owns a property, there is no way for you to use the property or benefit from the property in any capacity. Likewise, if you own an asset personally there is no way to move it into your tax-deferred IRA.

We know these rules well because we remind people every day.  We want all IRA owners - clients, prospective clients and otherwise, to know the rules so they never have to dread the call from the IRS.  Our number 1 job is education because we want every single person we speak with to know the rules.  While we do not take legal or fiscal responsibility for the self-directed IRA, we do feel a personal responsibility for your education. 

We like to think of ourselves as the angel on your shoulder when you make an investment decision.  You, of course, make your own decision.  But we try to whisper in your ear, "Prohibited Transaction", and "Self-dealing, don't do it".  We want you to have as much money as you can legally acquire when you're ready to retire.

And of course, you want that too.  We often get asked the question "how would the IRS know if I use the property?" As an administrator of self-directed IRAs, we don't get involved with how likely it is that someone gets caught in a prohibited transaction; we are focused on not allowing clients to get their IRA involved in a prohibited transaction in the first place. Granted, there are not IRS police spying on your IRA-owned property trying to catch you in the act of using the property. However, if you or your IRA gets audited there is a very high likelihood of getting caught if you did in fact break the rules.

Another unique thing about the IRS that you should understand is they don't just look at the transaction itself, they also look at the circumstances involved. We've had prospective clients propose structured arrangements to get around the rules. We've heard things like "what if I sell my personally owned property to my friend and then buy it back with may IRA.... how would the IRS ever know?" The fact is, it would take the IRS all of about 2 minutes to see what you've done and to declare the arrangement as a prohibited transaction. Buying the property with your IRA from your friend is not directly a prohibited transaction; however, the arrangement of selling something you own to the friend and then buying back with the IRA is most definitely a prohibited transaction. Additionally, not only did you break a rule, but you intentionally created a scheme to get around the rules....The IRS is not going to take this lightly.

Other investors suggest using an LLC to get around the IRS rules. LLCs can sometimes be useful in structuring real estate investment.  However, they are not magical entities that make all the rules disappear. If your IRA invests in an LLC, then the rules apply to the IRA now apply to the LLC as well.

The penalties for prohibited transactions can be extremely harsh. The IRS does not tie their hands down by telling you exactly what will happen if your IRA takes part in a prohibited transaction. Each case is judged on a case by case basis. You will almost certainly lose your IRA tax-deferred status (the IRA would be immediately distributed to you personally). This can create an unexpected tax liability as well as penalties if you are under the age of 59.5. On top of that, they will most likely impose a 15% prohibited transaction penalty. There have been extreme cases when the prohibited transaction resulted in 100% loss of the IRA. Prohibited transactions are not to be taken lightly.

The bottom line is this: your IRA receives special tax treatment from the IRS.  IRAs have built in tax-deferred growth. In order to maintain that treatment, it is important that the IRA investments are just that...investments. If you want to use the IRA funds or benefit from the IRA funds then you should take a distribution, pay the tax and then do whatever you like with the funds. However, while they remain in the IRA you (and your direct lineal family members) should not benefit from what the IRA is doing. So next time you are trying to think of a creative way around the IRS rules, STOP!.... there is no legitimate way to get around the IRS rules.

When the first King levied the first tax on the first farmer, humanity began our hate/hate relationship with taxes and, in some cases, tax collectors.  I can imagine that the biggest and meanest person would be tax collector, and this object of dread would take just about everything the farmer didn't already use.  Thankfully, these days, we are able to work a little magic with IRAs, HSAs and other tax-deferred and tax-free options. 

Of course it's not magic, but it sure can seem that way unless you're a CPA in title or experience level.  We here at Entrust New Direction have had so many questions about UBIT, taxes on IRAs and taxes on other retirement accounts,  we decided to open an accounting firm, IRA Tax Services, Inc. - specifically to help people with these types of accounts.

However, as education is really our #1 priority, we want to share some answers with you in a couple different FAQ blog posts.

Question: My Roth IRA purchased a rental property, funding it with 10% from the IRA and 90% from a bank loan. The net income is $3,000 a year. Is all the net income from this property tax-free? Or is $2,700 taxable and only $300 is tax-free?

Answer: The bank loan part is subject to UBIT. You referred to net income. If your calculated net income is $3,000, after all expenses (including depreciation), then roughly 90%, or $2,700 is taxable to the IRA. The IRA's first $1,000 would be tax-free, thus, it would pay tax on $1,700 (around $255). If you didn't calculate net income (Unrelated Business Taxable Income) with all allowable expenses and depreciation, then go back and do so. We often find that IRAs, like other real estate investors, find that they have positive cash flow but a tax loss. It is important to file the 990-T to report the loss and thus carry it forward to future years. Also note the debt-financed percentage is recalculated each year.

Question A Wall Street Journal Article that I found says ". . . any leveraged property in an IRA can trigger the Unrelated Business Income Tax. When mortgaged investments post a profit of over $1,000 in any year, the gain beyond $1,000 is taxed at anywhere from 15% to 40%. IRA investors can get around the tax by applying excess profit to the loan principal. Once the loan is paid, the UBIT no longer applies to any profit, and if the property is held for an additional 12 months in the IRA, eventual sale profits won't be subject to the tax either."

The quote above states "IRA investors can get around the tax by applying excess profit to the loan principal." Is it true that applying the excess profit from rents to principal pay down will avoid UBIT? Thank you.

Answer: What the article should say is not "get around that tax", but instead that paying down the debt balance will reduce the taxable portion of the income. The intent of the article is to highlight that by paying off the loan as soon as possible (and then have a 0 loan balance for a 12 month period), the IRA can reduce to 0 the debt-financed percentage and thus have no UBIT. The profits from the investment, plus any other available cash can be used to pay down the loan. Note that this strategy limits your IRA's other investment options since the money is going to the bank instead of buying new investments. Run the numbers to see what makes the most sense in your situation.

Question  Let's just say my self-directed IRA purchases a 5% interest in an LLC that buys a shopping center for cash. In the first year, the LLC has net income of $100,000 and distributes $5,000 to the IRA. The following year, the LLC obtains a non-recourse loan of $1,000,000. The LLC uses $100,000 of the loan proceeds to hire an unrelated contractor to make improvements to the property, and distributes $900,000 of the proceeds.  $45,000 of this $900,000 is distributed to the LLC. After the debt is added, net income remains the same, and thus $5,000 of net income is distributed to the IRA in year two. Is there now unrelated business income, and if so, how much?

Answer The amount of UBIT is determined on the percentage of the amount of total indebtedness from the acquisition of the property. Depending on the business activity of the LLC, it may be that the LLC is operating a business, and thus all of its earnings may be subject to UBIT as a result.

Assuming in your example that the LLC is just a passive rental operation, then you need to calculate the debt financed portion of the property. Using the property for security for a loan does not make the property debt-financed unless the money is used on the property. In your case, $100,000 of the loan which was used to improve the property is debt-financed, and income generated by the overall debt-financed portion is subject to tax (avg debt/average depreciated basis of the property plus improvements).  The other $900,000 was not used to acquire any asset, other than the cash, and that is not generating income as it has been distributed. It does not enter into the UBIT calculation.

Confused?  Have more questions?  You can always use IRA Tax Services and ask your own question. Or, like some of our clients, just drop off a truckload of documents duct-taped together in a big ball and hope for the best.

Just Kidding.   Please keep your documents organized.

You can imagine the dismay of our fantastically patient Director of Accounting, Deborah Broaddus, when she was in the middle of being flooded with a zillion questions from clients about recently received statements and gets yet another question from me, an employee who should know better, about IRS reporting forms. Well, one of the things I've always loved about my job is that I learn something new every day and evidently this day was the day I would learn about how 1099-R and 5498 forms and IRS reporting work together.

I promised Deborah in exchange for her infinite patience with me that I would share what I learned with all of you, since many may have the same questions that I did. Or something similar.

Have you recently asked yourself, 'Why did I get this 1099-R? I didn't make a distribution.' See below for a list of reasons why people receive 1099-Rs. Depending on the reason you receive a 1099-R, you may or may not have tax consequences (see the discussion of the 5498 form below), but it is still good to understand the form and why you received it.

You will receive a 1099-R if you:
* took a distribution from a retirement account.
* made a conversion of a Traditional IRA to a Roth IRA.
* devalued an asset to zero.
* rolled funds over from a 401k to an IRA or other retirement plan.
* rolled funds over from an IRA to an HSA.

If you did one of the first two items on the above list, your reported income will increase by the amount on the 1099-R form. If your asset was devalued to zero, you essentially are paying tax on a distribution that has zero value. No matter what your tax rate, tax on something worth nothing is also equal to nothing.

If you received the 1099-R form for one of the last 2 reasons listed above, another reporting form becomes relevant, form 5498 which is also filed with the IRS by Entrust New Direction as part of our annual IRS reporting. The 5498 will reflect the results of any rollovers you made to accounts held by us.

For example,if you rolled funds from an IRA to an HSA like my family did, the 5498 will reflect that the amount reported on the 1099-R was rolled over into an HSA and not received by you personally (remember the IRS only allows that once in your lifetime). The same is true if you rolled funds over to an IRA from a 401k plan. The net result is that the 5498 will indicate that the amount reported on the 1099-R did not result in increased income for the current tax year.

Your first statement of the year serves as your substitute form 5498.  You can reference this form for your records. As long as the amounts on the 1099-R match the amount listed as the rollover which funded your account on your statement from us, the net resulting tax is zero. Keep your statement (substitute 5498) and the 1099-R form with your tax files for documentation.

Uncle Sam wants YOU to save more funds for retirement. Why?

First, the facts.  President Obama announced three ways for you and I to save more retirement funds.

The president wants to make it easier for small businesses to automatically enroll their employees.    Next, there is an option for tax refunds to be converted automatically to US savings bonds.  Third, if employees have sick or vacation time remaining when leaving a job, they can convert that time to retirement funds. 

These stipulations will be enacted without Congress intervention, through the Department of Labor.

At first glance, these may seem to be altrustic moves by the government.  Behavioral economics studies indicate that if one is automatically opted in to a retirement fund, they're unlikely to opt out (and vice versa).  Certainly it's better for people to have more retirement funds, right?  While savings bonds won't exactly turn your retirement dreams to gold, it's good to have more options that aren't the stock market.  And regarding the vacation/sick time, again, more retirement funds and more options are positive. Seems like maybe the government is helping us out?

Or maybe our federal government is just watching out for itself, acting more like Big Brother than a big brother.

Maybe the federalis realize that if we individual citizens don't have enough of our own money saved for our own retirements, we will rely on a social security system that, if status quo continues, will be dead soon. When the number of Social Security collectors goes up a record 19% in the 2009 fiscal year, as reported in USA Today, that indicates to me that:

A) Seniors are not finding supplemental income

and/or

B) Seniors want to take advantage of social security while it's still there

What will the government do with millions of hard-working Americans who rely on social security when there is no social security?

It's a classic conservative versus liberal argument.  Shall we help the people in rough fiscal circumstances or should they be required to take care of themselves?  Should those with sufficient funds be required to support those without sufficient funds?

President Obama also provided a quick sketch of some more possible changes which would require Congressional approval.  My personal favorite is automatically opening an IRA for employees at small companies without 401(k)s. Again, Big Brother stuff, and again helpful to the government.  But my perspective as a tax-payer and a person who is concentrating on retirement funds, this law would also help me as an individual.  Why?  Because if more citizens have their own retirement account, chances are less likely that I will have to pay for any one else's retirement with my taxes.

While the retirement funds are still your money, and while it's not difficult to opt-out, these are nanny state proposals.  One side of the political spectrum would say stay out of my paycheck, and the other would say we're helping you help yourself before it becomes an emergency.   But no matter which side you're on, it's clear that this administration wants you to save, not spend our way to success and happiness.  And it's clear that these will benefit the federal government itself, as much or more than individual Americans.

Painting by James Montgommery Flagg

Everyone's favorite government organization, the Internal Revenue Service, recently released their annual "'Dirty Dozen' Tax Scams", and some aspects of retirement arrangements did not slip by un-noticed. In this case, the IRS is looking out for your (and your IRA's) best interest.

To summarize and generalize, this quote is from IRS Commissioner Doug Shulman: "Taxpayers should be wary of scams to avoid paying taxes that seem too good to be true, especially during these challenging economic times. There is no secret trick that can eliminate a person's tax obligations."

The IRS is paying attention to IRAs, and is learning more and more about cheaters each year. The 2007 and 2008 Dirty Dozen both mentioned retirement arrangements; specifically, "Taxpayers should be wary of advisers who encourage them to shift appreciated assets into Roth IRAs or companies owned by their Roth IRAs at less than fair market value. In one variation of the scheme, a promoter has the taxpayer move a highly appreciated asset into a Roth IRA at cost value, which is below annual contribution limits even though the fair market value far exceeds the amount allowed."

This year's list includes a specific reference to LLCs.

Abusive Retirement Plans
The IRS continues to uncover abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers are using to avoid the limitations on contributions to IRAs as well as transactions that are not properly reported as early distributions. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into IRAs or companies owned by their IRAs at less than fair market value to circumvent annual contribution limits. Other variations have included the use of limited liability companies to engage in activity which is considered prohibited. (emphasis mine)

If you are considering an IRA LLC, please be aware of the legality and limitations. Don't trust just anyone you find on the internet (including us). Call the company, see how much they know about IRAs, the IRS, IRA LLCs.

For more information on the care and feeding of an IRA LLC (Checkbook Control IRA).

View full list on IRS website.

The basics:

Health Savings Account (HSA) is a savings account you can fill tax-free. You can use the account to partner with your self-directed IRA to invest, earning tax-free funds, which you can use to pay for future medical expenses tax-free.

Why I love my HSA:

1) tax shelter (up to $5,000 for family in 2009)

2) can be invested like a self-directed IRA

3) earnings are tax-free

4) never expires (can reimburse you for medical expenses from the moment you open the account until the day you expire).

5) can be filled with a one-time IRA rollover

An HSA can only be used with a High-Deductible Health Care Plan (HDHP), which is also referred to as a catastrophic plan. To me, that's what health insurance is for - catastrophes. Of course, like car or life insurance, the higher deductible, the lower the premium. This can be a good thing, depending on your situation.

The anecdotal evidence:

When I was covered by a standard health insurance plan by my old employer, I paid my $300 every month and my family's $20 doctor visit copays and my family's $20 prescriptions. We went to the doctor with almost every cough and rash and throat ache; we filled and took the prescriptions.

Then, I changed jobs and began the HSA/HDHP plan. At first, I was very unhappy about the change. I thought about how much the doctor costs, how much our numerous monthly prescriptions cost, and I was not happy.

But as the first year as a so-called "under-insured family" progressed, we began to notice a change. We went to the doctor less. We discovered in a couple cases that our medical problems could be solved by nutrition and habit changes. We started to feel better than we had before. We still visited the doctor when we wanted to, we still had monthly prescriptions, but less in both cases.

Slowly, as we examined the bills, we noticed another change. We were actually paying less for health care than with the standard health insurance! Plus, the money in our HSA, combined with our self-directed IRA, was growing steadily, which helps my worried mind.

You probably don't get a health care tax deduction

One more reason to consider an HSA-  you cannot deduct health
costs from your income unless 

    1) health care is 7.5% of total income and

    2) you itemize all your health care expenses

HSA works for us, it may work for you.  For more information, read What is an HSA?

The Roth IRA is quite possibly the best deal the federal government has ever offered tax payers.  But until 2010, this fabulous deal was only offered to people earning less than (approximately) $100,000.  Not so in 2010.  The federal government has announced a suspension of the rules for 2010.

The Roth IRA is like the pot of gold at the end of the rainbow. You can rollover any amount of money from a traditional IRA or 401(k) into a Roth IRA, and every dollar you earn with that money is TAX FREE.

The federal government really wants people to convert to Roth IRAs in 2010. There is one more reason to convert - you can pay the taxes from the conversion in equal amounts in 2011 and 2012. This means you get a no-interest loan for 2 years.

Besides earning tax-free dollars for you, the Roth IRA is one of the best vehicles for passing money to your heir.

See more information and sign up for an email list which we'll use to remind you to open a Roth IRA in 2010. 

Securities brokers and some accountants will be the first to tell you that you don't want leveraged property in either a Traditional or a Roth IRA because you will have to pay taxes in the form of "UBIT". The motivations of the anti-UBIT crowd speak for themselves, but, in nearly all decisions related to leveraging an IRA property or not are about doing the numbers. There is some feeling that UBIT is actually wrong, or a penalty for doing something you shouldn't, in fact, it is part of the tax law that usually pertains to non profit organizations and has been around for a long time.

Non Profits and UBIT

This is how UBIT and non profits are related: A Homeowners' Association "Dairy Glen", a non-profit corporation, has installed a pool and tennis courts for the residents. These facilities are supported by the HOA dues, paid by the residents of that neighborhood. At some point the HOA board decides that they are going to open the recreation facilities to the public and charge admission or offer memberships, all funds going back to the HOA accounts.

Down the road is "Muscle World, Inc." a gym that offers similar facilities to their members. Muscle World pays taxes like any other corporation but has a tough time competing with Dairy Glen because they have to pay taxes. This is where UBIT enters. The government, in order to force fair competition levies UBIT on Dairy Glen because they are now in a business that is unrelated to the original business of maintaining neighborhood facilities. How does this relate to the IRA?

IRAs and UBIT and Leverage in Real Estate

The amount of money you can shelter within an IRA is limited by the annual contribution limits and by how much an employer is allowed to put into your 401k which you may ultimately roll over to an IRA. They really don't want to give you unlimited ability to contribute to a tax-advantaged plan. If you bring additional funds into the IRA in the form of a mortgage, you are increasing the size of your IRA.

The government is willing to give you tax-deferred status on the income generated by whatever you have in the IRA initially but is not willing to shelter the profits of the net income generated by the extra funds brought into the account in the form of a loan. The IRA is treated like a non-profit but the additional funds brought in are not. Thus UBIT enters the picture.

Some Quick Facts

• When calculating UBIT from rental income it is only the NET income generated by the debt leveraged portion, after the deduction of operating expenses, interest and depreciation.
• LLCs will not protect you from UBIT, it still applies
• The IRA pays the tax, not you.
• The IRA has its own tax return and this return affects neither you nor your tax return
• For most leveraged real estate deals an IRA does not pay UBIT until somewhere between years 4 to 8 because of depreciation.
• Losses carry forward so file from inception

UBIT is generated by an IRA in three ways:

1. Net income generated by leveraged portion of an investment @ trust rate
2. Proceeds of a sale taxed based on balance of debt at time of sale @ capital gains rate (if 1 year or more after purchase, short term gains taxed at the trust rate
3. The IRA owns an operating business such as providing goods or services. Tax is on 100% of the net income using the trust rate. This situation is not covered in this article.

UBIT Illustrated

The best way to look at UBIT is not a snapshot but across several years. As mentioned earlier, most leveraged IRA properties don't generate UBIT until between years 4 and 8. This illustration shows year 1, the second looks at year 8.

Summary of key points on calculating UBIT:

• Taxed on Net Operating Income * Debt Financed %
• Taxed on Capital Gains at sale * Debt Financed %
• Debt Financed portion is recalculated each year.
• Tax is only a percentage of Debt Financed net income.
• Calculation of debt-leveraged % is actually the loan balance/depreciated basis of the property

John's Uncle IRA buys an investment property using a non-recourse loan*:

First Full Year of Operation

• Cost of property: $500,000
• IRA investment: $200,000
• Non-recourse Loan: $300,000
• Leverage: 60%
• Mortgage Pmt: $1,600/month
• Taxes & Insurance: $400/month

Other information:

• Rent: $2,500 per month
• Utilities: paid by tenant
• Net Cash Flow: $490/mo = $5,874/yr
• Depreciation: $14,545/yr.
• Principal Payments $4,474
• Interest Expense: $14,720 (4.95%)
• Net Loss Year One ($4,265)
• Annual Appreciation 2.5%

No UBIT is paid.

Year 8

• Rent: $2,951 per month T&I $475
• Utilities: paid by tenant
• Net Cash Flow: $876/mo = $10,512/yr
• Depreciation: $14,545/yr.
• Principal Payments $6,318
• Interest Expense: $12,876
• Net Income Year Eight $2,296

Calculation of UBIT:

Debt Balance/Depreciated Basis:

• 263,835/398,182 = 66.26%
• Net Income * 66.26% = $1,521
• UBI = $1,521- $1,000 = $521
• Tax ~ $104

Year 8

• Sale Price $609,201
• Costs of sale 3% - $18,276
• Net Proceeds = $590,925
• Current year Debt Financed % - 66.26%
• Capital Gain ($590,925-$426,587)=$ 164,338
• (Note $426,587 = depreciated basis)
• UBI portion $108,757

UBIT: $23,655
Gain: $164,338 - 23,655 = $140,683

A good exercise is to take the same size IRA and calculate the gain on a property with zero leverage. It would be difficult to determine the income generated by rental operations but, at the end of year 8, with the same appreciation would be $36,370 after deducting the cost of selling of 3%.

Before someone talks you out of leveraging a property within an IRA, do the numbers and decide for yourself. It may or may not made sense to use a mortgage but at least YOU will understand the decisions you make when investing your IRA money. A self-directed IRA is the only way you can purchase real estate AND have a mortgage on it. The flexibility of the self-directed IRA can provide you a world of choices regardless of which way the numbers go.

Catherine Wynne is a Principal in Entrust New Direction IRA, Inc. a self-directed IRA administrator. She is also a Principal in IRA Tax Services, Inc. A tax service company devoted entirely to IRA tax filings for Unrelated Business Income Tax ( UBIT or UBTI).