Building Real Estate Wealth – Watch Out for This Expensive TAX TRAP!

If you plan on using financing to help your IRA to acquire real estate you have walked smack dab into one ugly tax trap under the name of “Debt Financed Income”. Financing or as the tax law refers to it as “leverage” refers to obtaining a Mortgage, seller carry-back note, a private or hard money loan.

Normally income earned by an IRA is not subject to taxes, however, if real estate is purchased with borrowed funds, the income will be considered “Debt Financed Income” and the profits generated will be subject to “Unrelated Business Income Tax (UBIT).


The simplest explanation is, that the IRA is using non-IRA money to make tax deferred profits. Since the purpose of the IRA is to invest personal pre-tax contributions the use of non-IRA funds falls outside this design and results in a percentage of profits being taxed at trust tax rates in the calendar year when the profits are realized.

Here is an example, if your IRA purchased a property for $100,000, and financed $60,000 of the purchase price, the debt/basis percentage would be 60%, and so the IRA would have to include 60% of the profits as taxable income.

Lets say your profit on the sale of this single family house was $50,000 x 60% (debt basis) then $30,000 is considered “Debt Financed Income” and is subject to  “Unrelated Business Income Tax” which is assessed at trust tax rates – in this case up to 39.6% which amounts to a kick in the gut tax hit totaling $10,238.00

Oh by the way, if you think you can dodge the bullet because you are going to rent the house, think again. The net profits from your rent roll are also subject UBIT each and every year– Yikes!

Wouldn’t is be great if “Unrelated Business Income Tax” could simply disappear?

This is where choosing the right type of plan makes all the difference in the world.

A One-Participant 401k plan is NOT subject to UBIT as long as the financing is non-recourse to you personally. Congress actually created a special tax code exemption for Qualified Pension Plans (401k’s) that removes them from the profit sucking UBIT vacuum an IRA cannot escape.

Choose a One-Participant 401k plan and you can gorge yourself on all the financing you want to and invest in high ROI real estate properties for wealth building. Under market value real estate investments are a great way to build wealth, and the solo 401k is the way to do it.

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5 Common Problems With Buying Rental Properties (Which Is Why I Don’t!)

Are you a wanna-be real estate investor? Many people do indeed dream of owning under market value rental properties and someday earning positive real estate cash flow from them.

However, before you consider buying under market value investment properties, you really should think about what you are getting into. Being a part time landlord is usually a lot more hassle than many realize.

I am a full time real estate investor in San Antonio investment properties. At one time, I owned more than 100 San Antonio rental properties. I have deal with rental property problems many times and I have since stopped renting out properties and now I make real estate cash flow in another way without maintenance…..

But I am getting ahead of myself! Here are the common issues I’ve seen with rental investment properties:

  • Repair costs: If you are going to rent out your California investment property or Texas investment property (or wherever it is), you will most likely need to spend a good deal of money to make it ready to rent. Any damage to the roof, plumbing, foundation or electrical systems could cost a lot to repair.

This can especially trip up the part time landlord who has a full time job and has bought rental properties for real estate cash flow. Odds are you are not an expert in rehabs and you could easily overspend on fixing up the house.

Depending on which state you are buying your investment properties, you could have landlord and tenant laws that mandate that you add safety features to the house, such as handrails, peephole in the front door, adding a firewall, and a lot more.

  • Getting repairs done: As a rental property investor, you are going to have repairs that have to be done fast. Back when I was a landlord 10 years ago, I had water heaters go bad. Sometimes the house got flooded and I had to spend a couple thousand dollars to clean it up. Of course, the after hours plumber can cost you $100 per hour or more.
  • Collecting your rent: If you are lucky, you will have good tenants who always pay on time. But oftentimes, you have tenants who are late. This is an especially big problem if you buy your rental properties with mortgages. I never buy my under market value properties with mortgages, only cash.
  • Dealing with pain in the neck tenants: Eventually you are going to have to deal with tenants who damage your house or cause problems with other tenants. I once had a tenant who almost burned the house down. Of course, you will also have to deal with evictions at times, which can be problematic depending upon your state. In some states, the tenant can stay in the house 60 days or more without paying rent!
  • Keeping the property safe: If you rent out properties, you could be at risk of being sued if someone is injured on your property. You must keep the home maintained so that there are not potential accidents.

The bottom line on rental properties for me is to not invest in rental properties. There is simply too much hassle involved in them to make it worth my time. Been there, done that!

How I Invest in Below Market Value Properties Without Repairs

The way that I invest in San Antonio investment properties today is to buy my under market value property in cash, do $10,000 or so in rehab, and then seller finance it. This type of investing has four big advantages:

  • I have no mortgage. Yay!
  • My occupant is buying the house on terms from me. That means they maintain the property and do all of the repairs. Double yay! If they choose to not repair it, that isn’t my problem. I merely hold the note on the house.
  • I enjoy pure real estate cash flow in my under market value San Antonio properties. No expenses! Is this cool or what?
  • Because I buy investment property in Texas, foreclosing is very easy. I get the house back in 60 days and resell it again. I have resold the same house three times before: $5000 down, $800 per month.

Of course, this type of real estate investing takes CASH. But if you have an IRA or a 401k, you can often invest in these under market value houses.

Below is a great example of the type of investing my out of state investment property investors and I do.


The house above in on West Poplar Ave. in 78207 in San Antonio. It is a newly completed San Antonio investment property that was bought the the California investor for $44,000 in October 2015.

We conducted $10,000 of rehab on the property and put it on the market in December 2015. Total cost to investor was $54,000. It was resold in late January 2016 with the following terms:

  • $83,000 sales price
  • $5000 down
  • $627.61 per month ($800 per month PITI)
  • 9% interest
  • 30 year note

Total return for out of state property investor is 14% ROI. If you are interested in out of state investment property that earns 10-15% ROI with no maintenance, please contact us.

Below are more rehab pictures:

poplar 1

NEW 7 NEW 8NEW 9 NEW 10 NEW 11

NEW 1 NEW 2NEW 3 thumb_IMG_3598_1024 thumb_IMG_3600_1024


Based upon this 14% ROI return, I think you can understand why many of my investors from out of state USED to buy San Francisco investment property, San Diego investment property, Seattle investment property, and Los Angeles investment property. Now they mostly buy San Antonio investment property.