SD IRA and UBIT/UDIF taxes

[Jim Peret]

I'm looking to start a SD IRA checkbook LLC. I've got retirement accounts to fund it and start investing immediately.

I was talking to a CPA about investing in their Private Equity fund.. When I told him I wanted to us SD IRA money he said it wasn't a good investment for me. He said I have to pay UDFI tax on the leveraged amount. That would reduce the return too much. I heard about UBIT/UDIF taxes but didn't think they were that significant. I think most real estate investments should have some leverage. They talk about SD IRA investments for real estate a lot but is that for younger investors who haven't built their accounts up yet?

Any SD IRA investors dealing with this? Or anyone else got some feedback? I'd hate to put in index and bond funds. I sleep better with real estate as rents rarely go down.

[Brian Eastman]

@Jim Peret

Did the CPA help you run the numbers and see what the impact of UDFI taxation on the leveraged gains would be?

Sometimes when a "fund" is using leverage, your returns are diluted to the point where UDFI diminishes the ROI to the point of making the opportunity less than stellar.

The direct use of leverage into a single property held by the IRA would likely work out a lot better. For most investors, the impact of the taxation is minimal, and the IRA will see the significant part of additional cash-on-cash return that leverage produces.

Being the bank and lending the IRA money to other investors is another option that can produce consistent returns and does not have any UBIT/UDFI exposure.