Can flipping within ROTH SDIRA LLC trigger UBIT?

[Sandy Sawyer]

My idea is to avoid capital gains tax by flipping within the ROTH IRA while avoiding the transaction fees by managing the LLC myself. My questions are 1) What is Unrelated Business Income Tax as it relates to this? 2) Can I hire all the work to be done by contractors without going through a GC?

[Linda Weygant]

First of all, flipping is Ordinary Income, not Capital Gains.  The IRS does not care if you are buying a house, fixing it and selling it or buying bread and bologna and selling sandwiches.  It's the same business model as far as they are concerned.

As such, flipping in your IRA (even via an LLC) is most definitely a business and very much subject to UBIT or UDFI. Instead of avoiding capital gains taxes, you open yourself up to a very steep UBIT/UDFI.

Be VERY wary of managing any kind of business (even rentals) in your SDIRA. When you add labor to your IRA, the IRS is unable to value your labor and can take the position that you've added more than $5500 to your account. I've seen articles where advisers have said that you should not even go and change a light bulb in your rental property. This seems pretty severe, but it's an indication of how serious the IRS can get when investigating the transactions within your IRA.

The best route is to have only truly passive activities in your IRA (note investing, private money lending, hands-off rental property, etc).