Self-Directed IRA Real Estate Calculator
Project tax impact when a Self-Directed IRA owns leveraged real estate — Unrelated Business Income Tax (UBIT) and Unrelated Debt-Financed Income (UDFI).
Why Self-Directed IRA Real Estate Is Complicated
You CAN own real estate inside a Traditional, Roth, or SEP IRA via a Self-Directed IRA (SDIRA). However, the IRS imposes two complications: (1) Prohibited Transactions: the IRA cannot interact with 'disqualified persons' (you, spouse, ancestors, descendants, your business). Self-rental, self-management, or self-financing = entire IRA disqualified with potential 100%+ tax. (2) Unrelated Business Income Tax (UBIT): if the IRA uses leverage (mortgage), the debt-financed portion of income is subject to UBIT at trust tax rates.
Source: IRS Section 514 (UDFI), Section 4975 (Prohibited Transactions). Last updated: May 2026.
UDFI Math Explained
The Unrelated Debt-Financed Income (UDFI) calculation: take the percentage of property debt-financed × net income from the property. Example: $250K property, $175K mortgage = 70% debt-financed. If property generates $20K rental income net of operating expenses, the UDFI base is $20K × 70% = $14K. UBIT is then assessed at trust rates (graduated, hitting 37% at $15,200 of UBIT in 2026 — but typically 24-32% effective).
Solo 401(k) Avoids UDFI on Real Estate
Crucial workaround: Solo 401(k) plans (for self-employed without employees) are EXEMPT from UDFI for real estate leverage. Same SDIRA functionality but no UBIT tax on leveraged property income. If you're self-employed, ALWAYS use Solo 401(k) instead of SDIRA for real estate investing. Source: IRS Section 514(c)(9). For employed individuals without a Solo 401(k) option, SDIRA is the only path but UBIT must be planned for.
Prohibited Transactions — The Death Penalty
The IRA can NOT: (1) Be sold to or bought from a disqualified person. (2) Lend to or borrow from a disqualified person. (3) Furnish goods or services to/from a disqualified person. (4) Be used personally (you can't stay in the rental property even for one night). Disqualified persons include: you, your spouse, your descendants, your ancestors, their spouses, your business entities. Violation = the entire IRA is deemed distributed on January 1 of the year of violation, subject to full tax and 10% penalty.
Frequently Asked Questions
Can I buy real estate inside my IRA?
Yes via a Self-Directed IRA (SDIRA). Traditional Schwab/Fidelity IRAs don't allow real estate; you need a specialty custodian (Equity Trust, Quest, Forge, NuView, etc.). Cost: $150-$500 setup + $300-$500 annual custodian fees, plus transaction fees per purchase/sale.
What is UBIT and how much is the tax?
Unrelated Business Income Tax \u2014 applies when an IRA/retirement account generates business income or uses leverage. Tax rates are trust tax rates: graduated 10-37%, hitting top rate at $15,200 of UBIT in 2026. Effective rate typically 24-32%. Files on Form 990-T.
Why is leverage problematic in an SDIRA?
The IRS only allows tax-deferral on income generated by IRA's OWN money. Income from borrowed money is 'unrelated' to retirement purpose, so it's taxed currently as UDFI. Effectively neutralizes much of the tax-deferral benefit. The math often makes SDIRA + leverage worse than a regular taxable investment.
Can I manage the SDIRA property myself?
Generally no \u2014 managing the property yourself (collecting rent, scheduling repairs, screening tenants) is considered furnishing services to the IRA. Prohibited transaction. You must hire a third-party property manager. Some SDIRA experts argue 'minor administrative tasks' are okay, but the safer interpretation is total arms-length.
Can I sell the SDIRA property to my child?
No \u2014 your child is a disqualified person. Any sale would be a prohibited transaction. Must sell to non-disqualified third party. Same applies to parents, siblings, in-laws (spouse's family is disqualified).
Is Solo 401(k) better than SDIRA for real estate?
Yes if you're self-employed. Solo 401(k) is exempt from UDFI (Section 514(c)(9)). You get tax-deferred real estate income + leverage without UBIT. SDIRA only makes sense for non-self-employed who want IRA real estate access.