UBTI and self directed IRA

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UBTI and self directed IRA

Jason MalabuteBusiness Member

Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 904 votes

If a limited partner investor invest money out of his self directed IRA will he get hit by UBTI?

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Brian EastmanPro Member

Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes

@Jason Malabute

It will depend on the nature of the partnership and how income is produced.

As a limited partner, the IRA will have tax liability if taxable income to an IRA is created by the partnership.

If the partnership is engaging in a trade or business (as opposed to generating passive income like rents) then there will be taxable Unrelated Business Taxable Income (UBTI).

If the partnership is using debt-financing then there will be taxable Unrelated Debt-Financed Income (UDFI).

The presence of UBTI and/or UDFI will require the IRA to file a trust tax return on form 990-T and pay the resulting Unrelated Business Income Tax (UBIT).

It is always best to check with licensed tax counsel who can review the specifics of your intended IRA investment.

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Brian EastmanPro Member
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
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@Jason Malabute
It will depend on the nature of the partnership and how income is produced.
As a limited partner, the IRA will have tax liability if taxable income to an IRA is created by the partnership.
If the partnership is engaging in a trade or business (as opposed to generating passive income like rents) then there will be taxable Unrelated Business Taxable Income (UBTI).
If the partnership is using debt-financing then there will be taxable Unrelated Debt-Financed Income (UDFI).
The presence of UBTI and/or UDFI will require the IRA to file a trust tax return on form 990-T and pay the resulting Unrelated Business Income Tax (UBIT).
It is always best to check with licensed tax counsel who can review the specifics of your intended IRA investment.
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Bill ExeterBusiness Member
1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
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It is possible to defer or avoid the UBTI or UDFI if it is being triggered by the sale of the real property asset. The Self-Directed IRA can complete a 1031 Exchange and defer the recognition of the taxable gain upon the sale and thereby avoid triggering UBTI and/or UDFI. Your tax advisor should review the transaction to determine if a 1031 Exchange would avoid the triggering of UBTI and UDFI.
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Jason MalabuteBusiness Member
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Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 904 votes
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Originally posted by @Brian Eastman:
@Jason Malabute
It will depend on the nature of the partnership and how income is produced.
As a limited partner, the IRA will have tax liability if taxable income to an IRA is created by the partnership.
If the partnership is engaging in a trade or business (as opposed to generating passive income like rents) then there will be taxable Unrelated Business Taxable Income (UBTI).
If the partnership is using debt-financing then there will be taxable Unrelated Debt-Financed Income (UDFI).
The presence of UBTI and/or UDFI will require the IRA to file a trust tax return on form 990-T and pay the resulting Unrelated Business Income Tax (UBIT).
It is always best to check with licensed tax counsel who can review the specifics of your intended IRA investment.

so since the LLC will only producing rental income from the apartment does that mean the LP will not get UBTI?
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Brian EastmanPro Member
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
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@Jason Malabute
Rental income is passive in nature and will not generate UBTI.
If the project is debt-financed, then the LP will be receiving debt-financed income which is taxable to an IRA as UDFI.
If you are syndicating apartments and planning on bringing in IRA investors, which I believe you are, then you really need to lawyer-up on this topic. Get some professionals on your team who can make sure you are doing right by your investors.
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