When a retirement account uses debt to acquire income-producing property, part of the income can be subject to tax. Two acronyms matter: UBIT (Unrelated Business Income Tax) and UDFI (Unrelated Debt-Financed Income).

The short version

• Self-Directed IRA: the debt-financed share of net income may be subject to UBIT, reported on IRS Form 990-T. As the loan amortizes, the debt-financed percentage — and the taxable share — falls over time. See SDIRA Financing →
• Solo 401(k): qualified plans generally qualify for the real-property exception under IRC §514(c)(9), so leveraged real estate is typically exempt from UDFI. This is a major reason investors use a Solo 401(k) for financed real estate. See Solo 401(k) Financing →

How the debt-financed share works

UDFI applies only to the portion of income attributable to borrowed money. If a property is 60% financed, roughly 60% of the net income is “debt-financed” in year one. Because the loan balance shrinks as you pay it down, that percentage — and any UBIT — generally declines each year. A $1,000 specific deduction applies, and the tax is computed at trust rates.

Rough estimator

Educational estimate only. The real calculation depends on basis, holding period, deductions, and the year’s tax tables. Always confirm with your CPA.