Tax consequences for IRA investing in Syndication

[Li Tolentino]

What are the tax consequences for investing in syndication project with a self directed IRA? I was told by a IRA company representative that I may need to pay UBIT (unrelated business income tax). Is that true? The project I am looking at has a 60% commercial loan and have both Cash investors & IRA investors. Thanks.

[Brian Eastman]

@Li Tolentino

The matter should be discussed with your CPA.

An IRA has exposure to taxation in two situations. A syndicated or non-syndicated deal make create such exposure.

Engaging in a trade or business on a regular or repeated basis creates exposure to taxation known as UBIT.  This tax is meant to protect tax-paying businesses from unfair competition from tax-exempt entities.

The use of debt-financing creates exposure to taxation known as UDFI on the percentage of the income the IRA receives from the non-IRA (borrowed) capital.