Investor · Curtis, NE · Member since 2019 · 231 posts · 140 votes
Hey All,
I have reached to my accountant about this but thought I would ask here to see if anyone has done something similar.
An LLC of which I am the manager, and my SDIRA is the only member, is in the process of acquiring a property subject-to. Does the underlying mortgage debt, which I will be paying in an ongoing manner, qualify as a non-recourse loan and thus trigger UBIT? Does this make sense?
Yes the leveraged portion of the real estate will trigger UDFI which will cause UBIT. UBIT scales up to 37% so it can be a hefty tax depending on the numbers.
Easy math is this: $100k home. 50% down. 50% financed. So 50% of the income generated would get hit with UBIT. So if you made 10k then $5k of it would get taxed. After expenses are deducted.
FYI - if you qualify for a Solo 401k (self employed and no employees over 500 hours annually) then you can avoid this tax on leveraged real estate.
I have reached to my accountant about this but thought I would ask here to see if anyone has done something similar.
An LLC of which I am the manager, and my SDIRA is the only member, is in the process of acquiring a property subject-to. Does the underlying mortgage debt, which I will be paying in an ongoing manner, qualify as a non-recourse loan and thus trigger UBIT? Does this make sense?
Yes the leveraged portion of the real estate will trigger UDFI which will cause UBIT. UBIT scales up to 37% so it can be a hefty tax depending on the numbers.
Easy math is this: $100k home. 50% down. 50% financed. So 50% of the income generated would get hit with UBIT. So if you made 10k then $5k of it would get taxed. After expenses are deducted.
FYI - if you qualify for a Solo 401k (self employed and no employees over 500 hours annually) then you can avoid this tax on leveraged real estate.
Yes the leveraged portion of the real estate will trigger UDFI which will cause UBIT. UBIT scales up to 37% so it can be a hefty tax depending on the numbers.
Easy math is this: $100k home. 50% down. 50% financed. So 50% of the income generated would get hit with UBIT. So if you made 10k then $5k of it would get taxed. After expenses are deducted.
FYI - if you qualify for a Solo 401k (self employed and no employees over 500 hours annually) then you can avoid this tax on leveraged real estate.
What does it take to qualify for a Solo 401k? I am still a full time W2 cog.
Yes the leveraged portion of the real estate will trigger UDFI which will cause UBIT. UBIT scales up to 37% so it can be a hefty tax depending on the numbers.
Easy math is this: $100k home. 50% down. 50% financed. So 50% of the income generated would get hit with UBIT. So if you made 10k then $5k of it would get taxed. After expenses are deducted.
FYI - if you qualify for a Solo 401k (self employed and no employees over 500 hours annually) then you can avoid this tax on leveraged real estate.
What does it take to qualify for a Solo 401k? I am still a full time W2 cog.
You can have a w2 job. You just have to have legitimate self employment activity. Can’t be a hobby. No w2 employees over 500 hours other than a spouse. That’s it.
The use of a non-recourse loan in an LLC owned by a Self-Directed Individual Retirement Account (SDIRA) can have implications for Unrelated Business Income Tax (UBIT).
In general, when an SDIRA invests in real estate using a non-recourse loan, it can trigger UBIT. UBIT is applicable when an exempt organization, such as an SDIRA, engages in a trade or business unrelated to its tax-exempt purpose.
Here are some key points to consider:
Non-Recourse Loan: If the LLC is using a non-recourse loan to acquire the property, it means that the lender's only recourse in the event of default is the collateral (the property itself). This is typical for real estate transactions involving an SDIRA.
UBIT and Debt-Financed Income: The Internal Revenue Code imposes UBIT on income derived from debt-financed property. If the LLC generates income through the use of a non-recourse loan (i.e., rental income or capital gains), the portion of the income attributable to the financed amount may be subject to UBIT.
UBIT Threshold: There is a specific threshold for UBIT, and not all income generated from debt-financed property triggers UBIT. If the gross income from an unrelated trade or business is $1,000 or more, the organization may be subject to UBIT.
Consult with a Tax Professional: The rules regarding UBIT can be complex and may be subject to change. It's crucial to consult with a tax professional who is knowledgeable about self-directed IRAs, real estate transactions, and UBIT to ensure compliance with current tax laws.
Given the intricacies of tax regulations and the potential consequences of mishandling SDIRA transactions, seeking professional advice is highly recommended. Your accountant or tax advisor should be able to provide guidance based on the latest tax laws and regulations.
Yes the leveraged portion of the real estate will trigger UDFI which will cause UBIT. UBIT scales up to 37% so it can be a hefty tax depending on the numbers.
Easy math is this: $100k home. 50% down. 50% financed. So 50% of the income generated would get hit with UBIT. So if you made 10k then $5k of it would get taxed. After expenses are deducted.
FYI - if you qualify for a Solo 401k (self employed and no employees over 500 hours annually) then you can avoid this tax on leveraged real estate.
What does it take to qualify for a Solo 401k? I am still a full time W2 cog.
You can have a w2 job. You just have to have legitimate self employment activity. Can’t be a hobby. No w2 employees over 500 hours other than a spouse. That’s it.
Do you report any income on a schedule C?
Hey @Brett Synicky - I do not have any income reported on schedule C, but that'e easy enough to remediate. Is there a threshold you want to make sure you reach relative to the minimum reported on the schedule C. And is it really as simple as that?
Yes the leveraged portion of the real estate will trigger UDFI which will cause UBIT. UBIT scales up to 37% so it can be a hefty tax depending on the numbers.
Easy math is this: $100k home. 50% down. 50% financed. So 50% of the income generated would get hit with UBIT. So if you made 10k then $5k of it would get taxed. After expenses are deducted.
FYI - if you qualify for a Solo 401k (self employed and no employees over 500 hours annually) then you can avoid this tax on leveraged real estate.
What does it take to qualify for a Solo 401k? I am still a full time W2 cog.
You can have a w2 job. You just have to have legitimate self employment activity. Can’t be a hobby. No w2 employees over 500 hours other than a spouse. That’s it.
Do you report any income on a schedule C?
Hey @Brett Synicky - I do not have any income reported on schedule C, but that'e easy enough to remediate. Is there a threshold you want to make sure you reach relative to the minimum reported on the schedule C. And is it really as simple as that?
Pretty much. You can add money to the Solo a few different ways. Rollover from a qualified retirement account and contributions. There's 2 types of contributions. Employee and employer. Employee 23k and you can put 100% of what you pay yourself up to that amount. The profit sharing can be contributed up to a max of 20% (sole prop/single member LLC) or 25% (Scorp) of what you pay yourself for the year. For 2024 these totals cannot exceed $69k (double that if your spouse is an employee of the sponsoring company). It's an amazing retirement vehicle for self employed.
I think the risk of you having a prohibited transaction (extension of credit and not using a nonrecourse loan) is the real issue and not necessarily UBIT. If this is the case, it would be considered a deemed distribution of your account which could result in adverse tax consequences.
I think the risk of you having a prohibited transaction (extension of credit and not using a nonrecourse loan) is the real issue and not necessarily UBIT. If this is the case, it would be considered a deemed distribution of your account which could result in adverse tax consequences.
Hey Jeff - are you saying the LLC acquiring a property subject-to an existing loan is a prohibited transaction?
I think the risk of you having a prohibited transaction (extension of credit and not using a nonrecourse loan) is the real issue and not necessarily UBIT. If this is the case, it would be considered a deemed distribution of your account which could result in adverse tax consequences.
Hey Jeff - are you saying the LLC acquiring a property subject-to an existing loan is a prohibited transaction?
@Bob Willis I took your original post as the LLC being the LLC that was created specifically and only for the SDIRA. It must have a trust (newer and less common) or a special purpose, single member LLC to work. Isn't that what you meant?
@Bob Willis I think the answer is, it depends. Typical CPA answer, but things are often grey. I would first run the fact pattern by your custodian and see if they will conclude on it, but if they punt I can refer you to a solid ERISA attorney that I collaborate with in situations that I myself am not 100% certain of. None of us here on BP has all of the facts and reviewed any documents so I would proceed with caution on this one and get complete assurance.
I have a friend who saw what we were doing with our SDIRAs & SOLO401Ks any buying rentals. He was/is a W2 earner with a commercial construction company.
He opted to start a 'construction consulting business' on the side and with the blessing of his employer. He estimates he puts about 10-20 hours a month into this 'side hustle' and earns 10-15% of what his W2 salary is.
I *think* the important part is the 'intent' to make a profit and be a legit business.
I should also mention his main reason to want to do a SOLO401K instead of a SDIRA is that he ALREADY had 500K + in a Traditional IRA that he rolled over, and THEN leveraged.