Selling Partials To Provide "Financing" For SDIRA - No UBIT/UDFI?

[Bryan Hancock]

It constantly amazes me how little I know about real estate investing.  Every year I hear about investors doing creative things to avoid taxes that never would have occurred to me. 

Eddie Speed traveled to Austin to present at my WIN meeting this week and he described a technique that he teaches at his Note School.  I think I understood it, but some of my details in this post may be inaccurate.  Feel free to point out anything I am missing if you now of this technique.  

Scenario:

• SDIRA purchases a note at a severe discount to face value
• Manager of SDIRA breaks the note into two pieces: The first X payments and the remaining Y payments
• SDIRA sells the first X payments to another passive investor to recoup the value of their initial investment in the note
• Presumably the process is repeated thereafter

So this is really a proxy for "financing" and presumably avoids UDFI and possibly UBIT for lucrative investments held inside of a SDIRA.  If you used this technique with a SDIRA Roth I am assuming it would could be quite lucrative and provide for nice, tax-free profits.  

Any thoughts on this?  You'd have to buy the note at a big enough discount to later sell to another investor for a smaller discount to retain the remaining Y payments.  I'm not really sure how many payments one could retain and it would probably depend on the note, but it seems like this would be a good way to utilize SDIRA accounts and avoid UDFI.  I'm not really sure about the implications for UBIT, but if you made a business of this I am assuming that this tax may apply.  

[Mike Hartzog]

You can do this in an SDIRA no problem.  It's a simple cash purchase followed by a simple cash sale of a portion of the asset.  The thing you need to stay away from to avoid creating UDFI (which is subject to  UBTI) is using outside financing to acquire the asset or adding financing after the acquisition.