• If your IRA owns mortgage-leveraged real estate, you owe UBIT.
• If your IRA or 401(k) owns an active business structured as a pass through entity (such as an LLC or partnership), you owe UBIT.
• If your 401(k) owns mortgage-leveraged real estate AND the mortgage is a “seller carry”, you owe UBIT.

UBIT, or Unrelated Business Income Tax, applies to tax exempt organizations including retirement plans. To pay UBIT, Form 990-T must be filed with the IRS. If this is all news to you, once you are done scolding yourself, you may want to file for an extension using Form 8868.

Something I’ve been running into lately is Self Directed plan investors who speculatively bought a house or condo in previously hot markets (think Vegas, Florida, Phoenix, etc). Some of these areas have experienced declining values and declining rental income for short term rental properties.

If your plan (IRA or 401k) bought a house & obtained a non-recourse mortgage loan qualified based on short term rental income that has declined, you probably have negative cash flow. How can you avoid foreclosure? Loan money to your IRA/401k.

Loaning money to your IRA or 401k

A little known Prohibited Transaction Exemption has been issued by the Department of Labor. The authority and responsibility to deal with prohibited transaction interpretations and exemptions was passed from the IRS to DOL in 1978. PTE 8026 says that an accountholder/participant can make an interest free loan to their plan without triggering a prohibited transaction if:

• No interest or fee is charged to the plan;
• The loan proceeds are only used to pay for ordinary operating expenses of the plan ( i.e. mortgage loan debt service payments); and
• The loan is unsecured

This could be very useful for a person who has a plan owned property whose negative cash flow cannot be offset by annual contributions.