UBIT or UDFI on Checkbook SDIRA syndicated investment?

[Account Closed]

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?

[Dmitriy Fomichenko]

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.