IRA Flipping Machine – Using a UBIT Blocker
Flipping houses can be a very profitable activity. As a result, we speak with many investors each month wanting to use a self-directed IRA or Solo 401(k) for flipping houses. Unfortunately, this strategy often becomes undesirable due to the potential for exposure to Unrelated Business Income Tax (UBIT).
UBIT is a trust tax that applies when a tax-exempt entity like an IRA regularly engages in a trade or business and is therefore competing with taxpaying businesses. The federal tax rate can get to be as high as 37%. That can really put a dent in the ROI your IRA may receive from a flip transaction.
With the passage of the Tax Cuts and Jobs Act of 2017 (TJCA) and the lowering of the federal corporate tax rate to 21%, there is now a better way to use IRA funds for flipping that can be much more profitable. This strategy involves the use of a blocker corporation.
Background – Understanding UBIT
As noted above, the main barrier to flipping houses in an IRA is exposure to UBIT. So what is UBIT? Exposure to Unrelated Business Income Tax occurs when a tax-exempt entity engages in a trade or business activity on a regular or repeated basis. Such trade or business activities include active real estate deals such as flipping, new construction for sale, and wholesaling properties. UBIT also applies when an IRA receives income (other than dividends from a taxable corporation) from a business such as a partnership or LLC that is providing a product or service. Certain activities that qualify as passive are exempted from UBIT, such as interest, dividends, royalties, rent from real property, or the sale of an asset that has been held over time to produce such passive income.
The purpose of UBIT is to level the playing field and protect tax-paying businesses from unfair competition stemming from tax-exempt entities that are substantively acting like a commercial business. If a tax-exempt entity like an IRA engages in what may be deemed as a business such as flipping a property only on an infrequent basis, it has not met the “regular or repeated” condition necessary and may not have exposure to UBIT. Unfortunately, there is no clear guidance from the IRS as to what in general would constitute “regular or repeated”, so the IRS has a lot of leeway to determine if the type and frequency of transactions cross that threshold and has UBIT exposure.
When UBIT applies, the IRA or 401(k) will need to file a form 990-T trust tax return to pay the necessary tax due. Trust tax rates apply, and are on a graduated scale, but they top out at 37% with $12,500 of net income after allowable deductions. Many states also have their own version of the tax that will apply as well.
The Impact of UBIT
The following example is an oversimplification, but illustrates the possible impact of UBIT on a flip transaction.
Acquisition cost:$100,000Sales Price after Rehab$200,000Gross Income$100,000Rehab & Holding Costs-$50,000Sales Commission/Fees-$16,000Net Income$34,000UBIT-$10,967After-Tax Profit$23,034After-Tax Net ROI15%
With this deal, your IRA made $23,034 on an investment of $150,000, for a net after-tax ROI of 15%. There are probably simpler and less risky means of generating 15% returns to the IRA such as private lending.
Strategies for Avoiding UBIT
In the past, there have been two primary strategies available to eliminate exposure to UBIT on home flipping opportunities.
Be the Bank: Have the IRA lend money to an unrelated 3rd party engaging in a flip. Such private or hard money loans generate interest income, which is passive in nature and therefore not subject to UBIT. The loan must be for fixed points and interest only, and may not serve as a means for the IRA to receive an equity stake in the profits of the flip. Generally, such loans might be for 1-3 points up front and 10-15% interest depending on the many factors such as how well you know the borrower, LTV, relative risk of the project, time-frame, etc.
Hybrid Flip: With this strategy, the IRA acquires a property at discount and adds value via rehab. Rather than immediately sell the property and have the transaction considered a trade or business, the property is then held and operated as a rental for a period of at least a year. In the future when the property is sold and the added value of the rehab is captured, this is not viewed as a flip/business and is therefore not subject to UBIT. This can be a very profitable approach simply by shifting focus and being patient, as the IRA will not only capture the equity gain in the value of the property in a fully tax-sheltered fashion, but also any net positive cash flow during the rental period.
While both of the above strategies work well within the envelope of a self-directed IRA or Solo 401(k), they are not really “flipping”, and do change the nature of the transaction.
Enter the UBIT Blocker
A UBIT Blocker is a taxable corporation inserted between a tax-exempt entity and a UBIT exposed transaction. The point of using such a vehicle is to lower the tax rate to the tax-exempt entity. Instead of the gains from a flip transaction being taxed at the higher 37% trust tax rates, normal corporate tax rates will apply. After tax-profits to the corporation can then be issued as tax-sheltered dividends to the underlying IRA or 401(k) plan. This strategy does not eliminate tax exposure, but can reduce the taxable rate. Such structures have been around for a long time, but, when the corporate tax rate was 35%, that really was not such a benefit for something like house flipping. Now that the top corporate tax rate has been lowered to 21%, there is a significant enough savings that the use of a blocker corporation may be beneficial for those investors wanting to flip houses or engage in other trade or business activities with their self-directed retirement plan.
Flipping with a UBIT Blocker
Let’s go ahead and take a look at our sample flip property and see how the numbers work out when using a UBIT Blocker Corporation.
Acquisition cost:$100,000Sales Price after Rehab$200,000Gross Income$100,000Rehab & Holding Costs-$50,000Sales Commission/Fees-$16,000Net Income$34,000Corporate Tax-$7,140After-Tax Profit$26,860After-Tax Net ROI18%
By implementing the blocker strategy, the tax impact of the transaction was reduced by over $4,500. This results in an increased ROI of 18% compared to 15% in the prior case. If you then magnify this savings over several flip transactions during the course of a year, the difference can be considerable.
Blocker Structures
There are several ways a blocker structure can be configured with a Checkbook IRA LLC or Solo 401(k) plan. With the Checkbook IRA LLC platform, it may make sense to elect corporate tax treatment for the IRA-owned LLC itself if the sole purpose will be a business activity such as flipping. If flips will only be one of many strategies deployed, then forming a separate corporation under the umbrella of the IRA-owned LLC may make more sense. This would allow for passive investments in the master IRA-LLC while UBIT exposed activities would take place within the sub-entity. In a Solo 401(k) it will be necessary to form a separate corporation owned by the 401(k) for this purpose.
Additional Concerns
Please keep in mind that all investments of a self-directed IRA or Solo 401(k) must be conducted at arm’s length and exclusively for the benefit of the plan. While the use of a UBIT blocker changes the tax rates, all rules related to self-dealing will still apply. You or a disqualified party may not add value to the IRA or 401(k) via the provision of services. You may simply administer investments. That means leave your tool belt at home and ensure that all work on IRA owned properties is conducted by unrelated 3rd parties.
If you are interested in establishing a new self-directed IRA plan for flipping, or would like to discuss adding a blocker layer to your existing Safeguard provided plan, please feel free to contact us.
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Quick answers to common questions
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
YES! In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS CodeSec. 401 IRC 408(a) (3)
It’s actually pretty simple. Early on, regulators let the securities industry take the lead in educating the public about retirement accounts. Naturally, brokers and banks promoted stocks, bonds, and mutual funds—giving the impression that those were the only allowed investments. That was never true... and still isn’t. You can probably guess why they kept the rest under wraps.
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Keogh
- 401(k)
- 403(b)
- Profit Sharing Plans
- Qualified Annuities
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll youraccount into a new Self-Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full-time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type.
A self-directed retirement plan is a type of IRA or 401(k) that gives you greater control over how your retirement funds are invested. Unlike traditional accounts held at banks or brokerage firms that limit you to stocks, bonds, and mutual funds, self-directed plans allow you to invest in a wide range of alternative assets including real estate, private businesses, precious metals, cryptocurrency, and more.
These plans still follow the same IRS rules and maintain the same tax-deferred or tax-free benefits as conventional retirement accounts. The difference is simply in how and where you choose to invest.
No. Moving to a self-directed IRA or Solo 401(k) does not trigger any taxes, as long as your funds are eligible for rollover.
Self-directed retirement plans maintain the same tax-advantaged status as traditional plans offered by banks or brokerage firms. The key difference is flexibility—our plans are designed to give you greater control and allow for a wider range of alternative investments beyond stocks, bonds, and mutual funds.
A prohibited transaction is any action between your retirement plan and a disqualified person that violates IRS rules and can lead to serious tax consequences. Under IRS Code 4975(c)(1), prohibited transactions include:
- Selling or leasing property between your plan and a disqualified person Example: Your IRA cannot purchase a property you already own.
- Lending money or extending credit between the plan and a disqualified person Example: You cannot personally guarantee a loan your IRA uses to buy real estate.
- Providing goods or services between your plan and a disqualified person Example: You can’t use your personal furniture to furnish a rental property owned by your IRA.
- Using plan income or assets for the benefit of a disqualified person Example: Your IRA cannot buy a vacation home that you or your family use.
- Self-dealing by a fiduciary (using plan assets for their own benefit) Example: Your CPA shouldn't loan your IRA money if they’re advising the plan.
- Receiving personal benefit from a deal involving your IRA's assets Example: You can’t pay yourself from profits your IRA earns on a rental.
If a transaction doesn’t clearly fall within the allowed guidelines, the IRS or Department of Labor may review the situation to determine if it qualifies as a prohibited transaction.
Disqualified persons are individuals or entities that are prohibited from engaging in certain transactions with your IRA or 401(k). Doing so could trigger a prohibited transaction, which may result in taxes and penalties.
Here’s who is considered a disqualified person:
- You (the account holder)
- Your spouse
- Your parents, grandparents, and other ancestors
- Your children, grandchildren, and their spouses
- Any advisor or fiduciary to the plan
- Any business or entity owned 50% or more by you or another disqualified person, or where you have decision-making authority
These rules exist to prevent self-dealing and ensure your retirement plan remains in compliance with IRS regulations.
(Reference: IRC 4975)
Understanding and following these rules can be tricky, but it’s very doable. The best way to stay compliant is to work with professionals who specialize in self-directed retirement plans. They can help you navigate IRS guidelines and avoid prohibited transactions.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
Yes. While self-directed retirement plans allow for a wide range of investments, there are a few important restrictions.
You cannot invest in collectibles or life insurance contracts, and you must avoid prohibited transactions—activities that benefit you personally rather than the retirement plan. These include things like buying or selling property to yourself or family members, using plan assets for personal gain, or self-dealing in any way.
Violating these rules could cause your entire IRA to lose its tax-advantaged status. To protect your account, it’s essential to work with professionals who understand IRS regulations and can help you stay compliant.
This is a common misconception. In many cases, professionals may simply be unfamiliar with self-directed retirement plans, as they fall outside their usual scope of work. CPAs and tax preparers are trained to file taxes, not necessarily to advise on alternative retirement strategies. Financial advisors and brokers often work for firms that focus on traditional investments like stocks and mutual funds—and may not benefit from or support alternative options like real estate or private lending.
Self-directed retirement investing is legal under IRS rules—but like any specialized area, it requires working with professionals who understand how it works.
The IRS has rules in place to make sure your IRA is used only for the exclusive benefit of the retirement account—not for personal gain or to help family members. These rules can get complicated because there are many ways a conflict of interest can occur, even unintentionally.
For example, if your IRA buys a house and rents it to your mother, you might be reluctant to evict her if she stops paying rent. That emotional connection creates a conflict between what’s best for your IRA and your personal relationships, something the IRS aims to prevent.
These rules help ensure your retirement account stays compliant and protected. (See IRC 408)
Yes. Most tax-deferred retirement accounts—such as Traditional IRAs, old 401(k)s, 403(b)s, and TSPs—can be rolled over into a self-directed IRA or Solo 401(k), depending on your eligibility. Roth IRAs cannot be rolled into these accounts.
You can contribute directly from earned income, subject to annual IRS contribution limits. The method and amount depend on the type of plan you have (e.g., Solo 401(k) vs. IRA).
To take a distribution, you'll request funds through your custodian or plan administrator. Distributions may be taxable depending on your account type and age. Early withdrawals may be subject to penalties.
For 2025, the Solo 401(k) max contribution limit is $81,250 if age 60-63, $77,500 if age 50-59 or 69+, and $70,000 if under 50. Traditional and Roth IRAs have a limit of $7,000 ($8,000 if age 50+). Limits are subject to IRS adjustments.
Yes. IRA contributions are typically due by your personal tax filing deadline (e.g., April 15). Solo 401(k) contributions follow your business tax filing deadline, including extensions.
IRS reporting requirements vary depending on the type of self-directed retirement plan you have. Here’s a quick breakdown of what you need to know
Please note: Our team can help you understand what’s required for your specific account, but we don’t provide tax or legal advice. We always recommend working with a qualified tax professional to ensure full IRS compliance.
Self-Directed IRA (Traditional or Roth)
- Form 5498 – Filed by your custodian each year to report contributions, rollovers, and the fair market value (FMV) of your account.
- Form 1099-R – Issued if you take a distribution or move funds out of your IRA.
- Annual Valuation – You'll need to provide updated FMV for any alternative assets held in the account, such as real estate or private placements.
Solo 401(k)
- Form 5500-EZ – Required if your plan assets exceed $250,000 as of year-end. Must be filed annually by the plan participant.
- Form 1099-R – Required if you take a distribution or roll funds out of the plan.
- Contribution Tracking – Keep records of employee and employer contributions. These are not filed with the IRS but may be needed for tax reporting or audits.
SEP IRA
- Form 5498 – Filed by your custodian to report contributions and FMV.
- Form 1099-R – Filed by your custodian. Issued for any distributions.
- Employer Contributions – Must be reported on your business tax return (and on employee W-2s, if applicable).
Health Savings Account (HSA)
- Form 5498-SA – Filed by your HSA custodian to report contributions.
- Form 1099-SA – Filed by your HAS custodian. Issued for any distributions.
- Form 8889 – Must be included with your personal tax return to report contributions, distributions, and how funds were used.
