Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
Hello,
I am in the process of setting up a SDIRA to purchase my first rental property. I am still trying to decide whether to buy it outright with the SDIRA funds or leverage it by borrowing about 50%.
As I have been reading up on the UBIT, I think I understand it, but not completely. I will be talking to both the SDIRA Custodian and my accountant both in the next day or two, but thought I would get some feedback here too.
My financial projections are as follows; 15,400 income, 5450 Expenses, 2096 of Interest (at 50% leverage), and 3548 of Depreciation for a 'Taxable Income' of 4305.
I am 'assuming' this means the UBIT would apply to 50% of of the Income - 50% of the Expenses - 50% of the Depreciation = 3201. Then deduct the Interest of 2096 for a Taxable Income of 1105 ?
My questions are;
1) Is Depreciation indeed deducted from the 'Leveraged' side before the UBIT is figured?
2) Is Depreciation NOT figured in on the non-leveraged side since there is no yearly 'taxable event'?
3) The Interest would be figured in full on the leveraged side since it does not apply to the non-leveraged side at all?
4) Where does the UBIT 'flow though' to on a personal tax basis?
I hope you got your answers; however UDFI is your issue not UBIT. Unrelated Debt Financed Income.
1) Is Depreciation indeed deducted from the 'Leveraged' side before the UBIT is figured?
Yes, Depreciation is deducted only from the leveraged side.
2) s Depreciation NOT figured in on the non-leveraged side since there is no yearly 'taxable event'?
Depreciation is NOT figured on the non-leveraged side.
3) The Interest would be figured in full on the leveraged side since it does not apply to the non-leveraged side at all?
The Interest would only be deducted on the leveraged side.
4) Where does the UBIT 'flow though' to on a personal tax basis?
If you partner with your IRA Your half would not be subject to UBIT or UDFI; however, it would be subject to income tax on your personal return. Only the IRA pays UDFI on the income.. You will pay tax on the withdrawal unless you use Roth funds.