UBIT / UDFI questions

Submitted by Mark K on Thu, 2014-01-16 18:48

I am looking into possibly investing into two real estate syndicates within my SDIRA. However, I want to know if I am at risk for UBTI or UDFI taxes. I will try to be as detailed as possible on each investment so that I can get a clear answer.

Investment #1) This is an LP that buys homes, rehabs them and sells them. I then get a return (and actually have two options, one with a preferred return and a % return above that, or another without the preferred return.) They use about 70% leverage in the fund itself. On their tax return, their income is classified as ordinary income, not capital gains, and they carry the unsold homes as inventory. My SDIRA will be a passive investor and have no management in the business itself.

Investment #2) This is an LLC that is buying a building to do a Condo conversion. There is a preferred return structure also set up on this, and they too are using leverage, about 60%. Again, my SDIRA will be a passive investor and have no management in the business itself.

If that is not enough details, please ask and I will see if I can provide. My question is: will I be potentially hit with UBTI tax on either of these two investments?

Thank you.



Submitted by mk foss on Thu, 2014-01-16 21:24

Whomever is promoting these investments should give you some information. UBI is a required disclosure on a partnership K-1.

  1. With the first investment – a business with inventory generally does produce unrelated business income. There is a $1,000 exemption and any losses can be carried forward until absorbed by income from the activity.
  2. Net income from debt-financed property is also UBI. The percentage of the profit attributable to the debt on the property is the amount subject to tax.
  3. The custodian is responsible for Forms 990-T with IRA investments. You need to make sure that the custodian will handle the filings (due April 15 each year but can be extended).
  4. You get into a “double-tax” situation when UBIT applies. The IRA pays a tax and the owner later pays tax on the same income when it’s distributed.

 



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