UBTI on SDIRA

[Dawn Hall]

I opened an SDIRA last November and bought a foreclosure property in December. I had a few minor repairs made ~$1000. We put it for sale or rent on Craigslist and actually sold it for a $14k profit. It took us until October to find another property. Same situation. Bought low. Put in about $1500 in repairs. Put it for lease or sale on Craiglist and sold it this week for $13.5 k profit.

Am I flipping? Is this subject to UBiT? My accountant is not versed in the SD IRA and Inhave seen some opinions that vary...one says you need to flip 5 properties, another says you have to hold for a year.

Opinions?

[Jon Holdman]

Neither a CPA nor a lawyer. But I do have two different SDIRA accounts with two different companies and have spent considerable time studying the subject and speaking with a lawyer about it. Without a doubt, this is flipping. How many you flip per year is irrelevant. Flipping is an active business. So, all your net profits after all your expenses and closing costs are subject to UBIT. I've not looked at the exact rates in a while. IIRC (and if they haven't changed), the first $1,000 is exempt. Then its a set of graduated tax brackets up to $10,000 (no, I didn't miss a zero.) After that its 35%.

But I may be out of date. A quick search turned up this form:

http://www.irs.gov/pub/irs-pdf/f1041es.pdf

This has a tax table on page 5 that says the tax is $3,011.50 plus 35% of the amount of taxable income over $11,650. Not sure that $1,000 exclusion applies anymore. Looks like $8,559 in UBIT to me. Also looks you're supposed to file quarterly payments, so there may be some penalties on that, too.

You need a new accountant, if you're going to engage in business like this and your current one is "not versed in the SD IRA".