SDIRA With Check Book + UBIT Tax Consequence

[Eden Meng]

Hi BP Community,

I am currently in the process of setting up SDIRA with Check book control to do my flips. The proceeds from the flips will be re-invested in syndication deals or move back to invest in stock market.

I am reaching out for guidance if this will create any tax consequences for the current year? If so, how do you personally plan your tax around it?

Note: I already scheduled with couple CPA for consultation. However, It is nice to hear from my peers who have more experiences in this arena. Thank you !

Eden

[Lane Kawaoka]

Why UDFI Might Not Be a Big Deal:

Low Passive Income: In most syndications, the passive income flowing back to you is often minimal, especially in the early years due to depreciation and other expenses. This results in a very low amount of income subject to UDFI and, consequently, UBIT. This is the biggest thing if you are going into a lot of deals which what you should do anyway due to diversification.

Solo 401(k) Advantage: If you're using a Solo 401(k) instead of an IRA, you avoid UDFI entirely. While Solo 401(k)s are still subject to UBIT, the absence of UDFI can simplify tax considerations and reduce potential liabilities.

Structuring for Tax and Liability Benefits:

While some investors consider setting up an LLC to loan money to a syndication, this approach is often overly complicated and not typically worth the effort, especially from the syndicator's perspective. A simpler and more effective strategy is to understand the tax implications and plan accordingly, possibly by working with a CPA who can review the specific syndication's operating agreement.

While UDFI is a factor to consider, it shouldn't be a deterrent to investing your retirement funds in real estate syndications. The potential tax implications are often minimal, and with proper planning, you can maximize the benefits of your investment while minimizing any tax burden.