Investor · Dallas, TX · Member since 2013 · 619 posts · 128 votes
If I plan to use funds in my Solo 401K to invest in a turnkey rental property (meaning a property that is rehabbed by a 3rd party, purchased by my 401K, and managed by a 3rd party) is that considered a "passive" investment thereby not incurring UBIT?
I've read differing opinions on this topic and would like an experienced hand to provide his/her opinion... paging @Steve Hamilton II or @Amanda Han :)
Bryan, you can use leverage for real estate acquisition transactions in a solo 401k and be safe from UDFI; however, inside an IRA is not a good idea.
This can all change however, if there is adequate room for depreciation to essentially zero out the income from the property. And yes depreciation is allowed.
Under IRC 514(a)(2), the deductions allowed with respect to each debt-financed property are determined by applying the debt/basis percentage to the sum of the deductions allowable.
The deductions allowable are those items allowed as deductions by chapter 1 of the Code which are directly connected with the debt-financed property or income therefrom (including the dividends received deductions allowed by IRC 243, 244, and 245) except that:
The allowable deductions are subject to the modifications provided by IRC 512(b) on computation of the unrelated business taxable income, and
The depreciation deduction under IRC 167 is computed only by use of the straight-line method. Reg. 1.514(a)
Assuming the IRA is eligible to be rolled over to the Solo 401(k), then yes, this is possible. A Roth IRA may not be rolled into a 401(k). Similarly, the Solo 401(k) could not accept an inbound rollover from an inherited IRA. A SIMPLE IRA may be rolled over, but only if the SIMPLE is more than 2 years old.