Hello, I'm looking for someone who can speak to the tax implications of investing in Mobile Home Park crowdfunding through a Roth IRA.
My understanding is that one of the disadvantages of investing in MHPs is that there can be less paper losses from depreciation as compared to investing in apartments or even SFHs because they primarily consist of land, not buildings. I also understood that that one of the disadvantages of using an IRA to invest in real estate is that you can't use depreciation to offset your income tax.
So then I thought to myself that maybe it makes sense to invest in MHP crowdfunding inside my self-directed Roth, where the fact that I don't "have to pay taxes" on the gains would theoretically offset the lack of depreciation benefits.
What confounds me though is the concept of UBIT (Unrelated Business Income Tax). I always thought of Roth IRAs as being "tax-free" but it appears that they are subject UBIT if it seems that the IRA "entity" is engaged in activity the IRS considers to be "unrelated" to it primary purpose (in this case, investing for retirement)...
Is there anybody out there who is doing this? What has been your experience?
Yes, you do need to worry about UBIT (and actually also UDFI which triggers UBIT as well, on leveraged investments which this one most likely is). The 1st $1000 is free and not taxed, but if you go above that, it can be a lot. The calculation is pretty complicated and depends on a lot of things. I recommend you talk to the sponsor and asked them what the UBIT/UDFI was last year and what they expect it for this year. Also, not every fund will accept IRA money, because it means extra paperwork. So you'll need to check 1st with them on this.
To answer your more general question: even though a mobile home park throws off less depreciation than an apartment complex, it still throws off a little bit. So by putting it in your self-directed IRA, you are "wasting" that. But if you do the actual calculations, it may not be that much.
To put it another way: the way to maximize the savings potential of your IRA would be to invest in something that has absolutely no depreciation at all (like a no leverage hard money loan fund). With an apartment complex, you "waste" more depreciation than with a mobile home park (which "wastes" less).
However, to add another wrinkle, depreciation is not a permanent deduction. It gets recaptured when the property is sold. So the "wasting" of this deduction by putting it into an IRA, may not be as bad as it seems at first, because in either case, the benefit of depreciation disappears at the end of the fund's life when they sell.
I have an article on the topic of using IRAs to invest that I will PM you.
Thanks, Ian! This is exactly what I was looking for. Good point regarding a hard money loan fund being another alternative.
I look forward to reading your article!
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