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Infamous UBTI tax

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  • Infamous UBTI tax

    Interested in a syndication deal I'm currently evaluating, but would need to utilize a self directed IRA to attain the minimum (stupidly did not open a SD 401K last year and no 1099 income currently).  I keep hearing about the infamous UBIT/UBTI tax if I go this route. But I cannot find any details as to how much of a tax impact this would be and how badly it would affect my returns. Let's say you invest 50 or 100k via a SD IRA. Does it wipe out half your returns?

    Wondering if it's worth the headache....

  • #2
    My dilemma, do I provide a little known useful tidbit to the OP. Even though I am philosophically opposed to the very idea of using self-directed retirement accounts for alternative investments. Or do I leave them to find their own rope with which to hang themselves.

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    • #3


      My dilemma, do I provide a little known useful tidbit to the OP. Even though I am philosophically opposed to the very idea of using self-directed retirement accounts for alternative investments. Or do I leave them to find their own rope with which to hang themselves.
      Click to expand...


      Same here...but I bet I'm not the only one who still wants to know.
      Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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      • #4
        For that kind of investment it's called a UDFI: unrelated debt financed income. You pay tax on the portion of income that is generated by the debt portion of the investment. If the debt load is 50% you pay taxes on 50% of the net income. It is relatively minor as the syndicate still gets to use depreciation and all the other tools to lower the net income on the K1.

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        • #5
          Thank you for the helpful response. I am amazed at the amount of snarky comments that are posted here when many of us are just trying to increase our knowledge and education in the financial realm. Some may even be urning away future potential business...

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          • #6
            Perhaps the question that you should have asked is, “Am I required to have current self employment income to establish a one participant 401k?”

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            • #7
              My understanding is that I would have to have 1099 income for the current year to establish a one participant 401k, which I do not have. Locums would be next to impossible to secure in my field and with my current solo doc clinic schedule and I have not secured any other form of 1099 income...hopefully that will change

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              • #8
                You are definitely required to have current year self employment income in order to make a current year one participant 401k contribution....

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                • #9
                  For UBIT purposes a self-directed IRA would be treated as a trust and taxed at the tax rates that are applicable to trusts.  This would wipe out over a third of the returns above $9,150 per year (see page 20 of the 2018 Form 990-T instructions) and a quarter of the returns between $2,550 and $9,150.  Here are links to the IRS form and instructions:

                  https://www.irs.gov/pub/irs-pdf/f990t.pdf

                  https://www.irs.gov/pub/irs-pdf/i990t.pdf

                   

                  Also please keep in mind that not all CPA's and tax preparers who prepare 1040's and more typical business returns are going to have experience with Self-Directed IRA UBIT.  In my career to date I have prepared Forms 990-T for tax-exempt organizations that had some source of unrelated business income (even one that was the result of a debt financed asset), but have never done one of these for an individual's self-directed IRA.

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                  • #10
                    Do you know if an e-REIT in a self directed IRA is going to generate UBIT?

                    I understand a Syndication within a self directed IRA will possible generate UBIT depending on what percent of the deal is debt?

                    but what about e-reits such as Fundrise e-refits?

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