JV with SDIRA Investor

[Jeremy Dymond]

This is my first post. I hope I didn't make the rookie mistake of asking something that has already been asked and answered. I looked all over the board and haven't found this specific situation. I am currently putting together a project through a JV. I will be the manager of the project from start to finish. I have an investor that wants to use his SDIRA as his portion of the capital. As he will maintain "arms length" from the project, I believe we have satisfied the first criteria as an eligible investment for a SDIRA. His concern, and also I'm personally curious, is around UBIT. Being that this is a project with the sole intent of building new construction for the purpose of sale, I know this eliminates the rental scenario that would prevent UBIT. Understanding that the most appropriate answer is to consult a tax attorney, which he is, can anyone shed light on the tax implications for him (more specifically, his SDIRA) in this scenario? TIA.

[Brian Eastman]

@Jeremy Dymond

There is not really a workaround. If the IRA has equity participation in a trade or business, then UBTI is being generated. If the IRA is a lender, that is passive income not considered UBTI.

If the returns are quite good, you can run the numbers and see if having the return eroded by taxation on UBTI still produces a better net after-tax return than the IRA is achieving today. UBIT rates top out at 37% at $12,750 of net income, so that is a pretty high bar of performance that needs to be met.