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Infamous UBTI tax

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  • Avatar MVrays08 
    Participant
    Status: Physician
    Posts: 14
    Joined: 02/13/2019
    Earnest refinancing bonus

    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….

    #212711 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1709
    Joined: 02/01/2016

    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.

    #212736 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7326
    Joined: 01/09/2016
    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.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #212747 Reply
    Avatar dennis 
    Participant
    Status: Retired
    Posts: 27
    Joined: 04/18/2019

    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.

    #212777 Reply
    Liked by MVrays08
    Avatar MVrays08 
    Participant
    Status: Physician
    Posts: 14
    Joined: 02/13/2019

    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…

    #212848 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1848
    Joined: 03/01/2018

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

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #212850 Reply
    Avatar MVrays08 
    Participant
    Status: Physician
    Posts: 14
    Joined: 02/13/2019

    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

    #212851 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1848
    Joined: 03/01/2018

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

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #212852 Reply
    mb(a)CPA mb(a)CPA 
    Participant
    Status: Accountant
    Posts: 7
    Joined: 04/01/2019

    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.

    #213591 Reply

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