My Experience with UBIT in my SDIRA

[Bob E.]

People talk about UBIT like a kid talks about a big scary monster under the bed.  Here is my experience as something to reference.  Ready..., Fire..., Aim...

I keept hearing about UBIT at seminars "Be careful, you could get hit with UBIT".  My frustration was there was never any detail behind it so, like any good entrepreneur who is told the can't do something, I started asking why not? and how CAN I?  Here is what I learned.  *** note I am not a lawyer or an accountant so check with your own professionals before jumping in.

I am a midwestern cashflow investor with a self directed IRA. I had 50k in my IRA that I wanted to invest but it was not quite enough to buy a property. With a few more dollars I would have enough but that would leave me with no reserve, a situation I was not comfortable with. To bridge the gap so I could by something NOW I decided to look into a loan to my SDIRA.

I called my IRA company and was told the following, I would have to file a form 990T, and it would have to be drawn up by an accountant. MY SDIRA servicer is owned by a CPA so I asked to talk to on of the accountants. The accountant told me that yes they could do this. My next question was "How does UBIT work". If I borrow 30k and use another 30k of equity to buy a property then the loan represents 50% of the property value and 50% of the profits are taxable. That seems reasonable to me but my next question was, "What happens as I pay down the loan"? the accountant I talked to told me that as I pay down the loan the amount of the profit that is taxable decreases as well. So if I pay off half the 30K loan and now have a 15k loan against a 60k house now only 25% of my profit is taxable. The loan has to be non-recourse, meaning that the only security for the loan is the property that is collateral, they cannot come after me personally if things go south.

Ready...,  Fire...,  Aim

The result was that I borrowed 30k from a private investor that I have worked with in the past in July and bought a 65k house.  My investor gets 10% for 7 years and a payment of $498.04.  I get a property That would take another year or two to save up for and rent it of $925 a month.  the cost to prepare the IRS paperwork $150, the tax owed $141.

Since I only owned the property for half a year I expect I will owe closer to $300 in taxes next year along with the $150 doc prep fee.  Overall I am happy with this deal.  My mom always told me that you only paid taxes when you make money, you can cut your taxes by simply cutting your profits or, in this case pay a small tax that declines over time.

[Taylor L.]

Thank you for sharing! I agree that UBIT is oftentimes presented as a big scary monster, but it's just another part of investing for me now. Initially I had a hard time finding a CPA that would file for a reasonable price, but ultimately got that worked out.