More Fun w/Self Directed (Roth) IRAs

[Jake Kucheck]

A while back, Holdman and I had what I thought was a very useful back and forth on a grey area of what was and was not a prohibited SDIRA transaction. You can read all about it here:

http://www.biggerpockets.com/forums/51/topics/58858-specific-sdira-transaction

Early on in Jon's advice, he says this:

My question is now this:

What determines "dealer" status or "active business". More specifically, if you're buying notes instead of property, how is this applicable? If you buy a note and the payor sells, refinances, or stops paying and requires you to foreclose, this is generally a good outcome for you because you will usually have bought the note at a discount to UPB. This causes income (the difference between your purchase price and what you net from proceeds of sale of the collateral). What are the rules regarding this income and whether or not it is subject to UBIT? As in, if it is, why? What period of time or amount of income earned make it so? If it's not, how do you know that definitively?

[Jeff S.]

401k’s are indeed subject to UBIT if they invest in a business. Same as an IRA.

They are generally not subject to Unrelated Debt Financed Income (UDFI) and can use leverage without incurring the tax an IRA would typically pay. This is a strong reason to use a 401k instead of an IRA if you want to invest your retirement funds along with borrowed money.