UBIT or UDFI on Checkbook SDIRA syndicated investment?

Question

Suppose a Checkbook SDIRA holder invests in a Syndicated LLC, which then purchases a piece of commercial property (i.e. Apartment Complex) using leverage that cash flows for 2-3 years before being sold due to appreciation and distributing the gains from the sale proportionately to the Syndicated LLC members.

In this case, and from my 'layman's' 30,00 foot view, it would appear that the SDIRA LLC is simply investing in another 'Company' and receives dividends. The SDIRA LLC is not directly investing in real estate and is not directly using non-recourse leverage. As such, it would seem that it is not expected to pay UBIT (pretty much a given) but UDFI is a bit more fuzzy. What are your thoughts? What are the IRS's thoughts?

Carl Fischer · Answer

Account Closed

Have your CPA give you an opinion. Not mentioned in the post is the % of ownership by IRA(s) which may be a factor -have the CPA check the “plan asset” rules. UBIT could apply.

If the company you are investing in is an “operating” company versus an “investment” company UBIT may also apply.

Dmitriy Fomichenko · Answer

Disclosure: I am not a CPA and taxes are not my expertise.

Larry, my answers is based on my understanding and experience and not a professional advice so be sure to check with qualified tax professional. Whenever you invest in an LLC, this represents ownership. All LLC members are partners, some passive, others managing partners. If the LLC is taxes as a partnership this means that whatever takes place in the LLC gets passed down to members through K-1, LLC itself does not pay the taxes (if you were investing your IRA into C-corp. that would be different story). Therefore if there is a property and debt used to acquire it - that would make the income of your IRA UDFI (unrelated debt finance income), which is subject to UBIT. If you decide to go this route be sure to have your CPA on board.

Steven Gesis · Answer

Check with CPA, but I thnk UBIT will have to be paid / reported.

George Blower · Answer

Account Closed

Correct that UBIT would not apply. However, UDFI may apply if the Syndicated LLC reports it as such on the K-1.

Dmitriy Fomichenko · Answer

@Jeff Greenberg,

Distributions from Roth IRA will be tax free to the account holder.

However, if the investment returns inside of the IRA are generated from an active trade or business (or from leveraged investment property) the IRA will be responsible for paying the UBIT, not the account holder, the tax will be due for the year in which the income was generated. The IRA would have to report the income using form 990-T:

https://www.irs.gov/pub/irs-pdf/f990t.pdf

George Blower · Answer

The following IRS pages are good resources for the UBIT and UDFI rules.

https://www.irs.gov/charities-non-profits/unrelated-business-income-tax

https://www.irs.gov/irm/part7/irm_07-027-008

Jeff Greenberg · Answer

@Dmitriy Fomichenko So if "Roth IRA at retirement will be tax free from income tax." How does the UBIT tax effect the IRA?

Dmitriy Fomichenko · Answer

@Jeff Greenberg,

I agree with you that UBIT should not be feared, it will has small impact on overall returns (if case UBIT applies).

However, the fact that it is Roth IRA would have no impact on UBIT. If there is unrelated business income UBIT would apply regardless if it is Roth, Traditional or any other IRA.

Distributions from Roth IRA at retirement will be tax free from income tax.

Jeff Greenberg · Answer

If your IRA is a Roth Ubit does not apply.  Ubit should not be feared.  Even if you have to pay it, it is still better than investing with cash as far as the tax treatment.  There is a good book on the subject. Leverage your IRA by Matthew Allen.

I am not a CPA or tax professional

UBIT or UDFI on Checkbook SDIRA syndicated investment?

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