Working through how debt-financed income and Form 990-T apply inside a self-directed IRA
A useful way to check understanding of debt-financed income inside a self-directed IRA before bringing it to a CPA is to lay out the mechanics in plain language first. What generally holds true: rental income, capital gains, and interest earned by an IRA are exempt from unrelated business income tax under the code, so an unleveraged rental inside an IRA simply compounds. If the IRA borrows to buy the property, the portion of income attributable to the borrowed money loses that exemption and becomes unrelated debt-financed income. That income gets reported on Form 990-T and taxed at trust rates, which reach the top federal bracket at a low income level, roughly 14,450 in 2026. There is a 1,000 dollar threshold below which no filing is required. The IRA itself pays the tax, not the account holder personally, so it comes out of account cash and reduces what compounds going forward. A Solo 401(k) is generally not subject to this treatment on real property debt. The two points worth confirming with a CPA before deciding whether a small leveraged rental is worth doing inside an IRA: whether the tax truly comes only out of account cash rather than personal liability, and whether the 1,000 dollar filing threshold is measured gross or net.
