I have a friend who buys and sells cars at the auto auction and wants to somehow figure out a way to work together with me using my money and no other real resources (i'm not involved in business). I want to avoid UBIT (Or all possible business taxes) so I am thinking the best way to approach this is lending him say $20K, secured by the cars he buys, and charging a loan fee of some type (like points or $1,000 per vehicle) Plus interest, for each car he buys and sells. I would love to just say "Ok, we split all profits" and he will agree to that, but saying that, from my research results in Unrelated Business Income Tax which is almost like investing with my own funds. The same concept can be applied to say wanting to partner with someone to start other types of businesses.... like a Food Truck. You want to split profits, but not run afoul of the UBIT restrictions. This may be an advanced question, but I would love to hear your feedback on this.
1) Any ideas on what i'm thinking...
2) Has anyone done this type of loan? Any idea where I can get sample 401K loan agreements?
All of your logic is correct. Using a loan with a specified rate of return will help you avoid UBIT. If you begin splitting profits, the income will be treated as operating income instead.
Just for comparison, I talked to a used car dealer about this and he pays investors 12% on their money (1 point a month), secured by car title. In the end, I decided I preferred real estate, as it's easier to find in case of default :)
Thanks Bryan. I will be lending to the dealership itself to purchase vehicles, then they resell to others with either their own financing or financing arranged by the dealership itself. With my funds, the cars are actually stored at the dealership. Though it's not like Real Estate, there are certain advantages that make it worthwhile. For example, most RE loans take 6+months and you need to keep looking for eligible borrowers and monitor rehab.
funding dealership can be good way to diversify, but you should set specific terms ahead of time. If you wish to have participation in the profit on top of that I suggest you consult with experienced professional as to avoid the UBIT.
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