Are the gains or income taxable from IRA real estate investments?
This is a frequently asked question. The answer is NO – in most cases. If an IRA buys investment real estate and then sells it at a profit, all income generated while it was held in the IRA and all the gains resulting from sale WILL be either tax-deferred (regular IRA) or possibly tax-free (Roth IRA), IF the purchases were all cash with IRA funds. If the IRA borrows to finance the purchases, any income and capital gain that is attributable to debt-financing will be subject to taxation. So, for example, if an IRA puts 50% down on a rental property and that property generates $10,000 net income after expenses per year, the IRA will be taxed on 50% of the net income (the amount financed) less the first $1,000 which is tax exempt, or $4,000 (e.g., 50% x $10,000 = $5,000, less the $1,000 exemption = $4,000). The tax is charged at the Trust tax rate schedule because an IRA is considered a Trust for the purpose of tax. The tax applied is called Unrelated Debt Financed Income tax or UDFI tax.
