Question on Traditional IRA to Solo 401(k) Rollovers and UBIT Exemption

[Paul Cordasco]

I have a very specific tax question regarding the UBIT (Unrelated Business Income Tax) exemption in Solo 401(k)s that is normally triggered by UDFI (Unrelated Debt-Financed Income) in IRAs. Does anyone know if traditional IRA (Individual Retirement Account) funds that are rolled into a Solo 401(k) are eligible for the UBIT exemption available in Solo 401(k)s when the UBIT is triggered by UDFI?

In other words, you rollover traditional IRA funds into your solo 401K (which is allowed) and then use debt to help purchase a property. The income from that property generates income. Now, if that property was held in an IRA that income would trigger UBIT because the debt related to the purchase created income (UDFI). However, solo 401ks are exempt from UBIT caused by UDFI even as IRAs are not. However, I was wondering if that exemption would extend to funds rolled into the 401k from an existing IRA.

Thanks in advance for any insights.