UBIT Taxes in Solo 401k

6 Replies

Have a Solo 401k that owns a couple of rental properties. Now rehabbing a new property I intend to flip, but discovered the UBIT tax issue. Several references discuss how holding for over a year avoids UBIT. One reference says that if the majority of fund properties are long term rentals and you have an occasional flip, it does not trigger UBIT. Any experience here on this issue?  

@Grant Huggins  

The IRS language is as follows:  If a tax exempt entity engages in a trade or business on a regular or repeated basis, then UBIT applies.

A single flip on rare occasion mixed into a portfolio of largely passive investments would not "likely" be subject to UBTI, with the caveat that the IRS has the final determination should they choose to take a closer look.  A conservative approach would be that if your intent was to flip the property, then UBTI applies.

Holding a property in and of itself does not eliminate UBTI, but just makes you a slow flipper.  Holding the property as a passive rental for a period of time would eliminate teh UBTI exposure.

One issue is work you do yourself.  That can be considered a contribution.  

Originally posted by @Brian Eastman :

@Grant Huggins  

The IRS language is as follows:  If a tax exempt entity engages in a trade or business on a regular or repeated basis, then UBIT applies.

Brian, you made a great post. Curious, do you think investing passively (providing equity capital for a preferred return) in an LLC partnership that manages a self-storage RE fund (the LLC is not the property manager, just the fund manager) would trigger the UBIT? What about something similar with a fund that bought a retail shopping center? Just starting and looking at some investment options. Any insights are greatly appreciated!!

Thanks so much for the advice, Brian. I guess my strategy will be to rent the property for awhile. Stephen, thanks for the reminder. I have hired a contractor.   

@Josh Rich  

Exposure to UBTI would depend on the nature of the arrangement.  If the funding entity is purely passive, and receiving passive income such as rent or interest, then there would likely not be UBTI.  If the funding entity has an equity position in the underlying business, there would be UBTI exposure.

To fully answer such a question would require more details, and would be something we could investigate for a client with one of our plans, but not as an a la carte service or as part of a web forum.  You should consult with your tax advisor.

If I may hijack the thread a little;

How does the IRS calculate the UBTI they will impose? And, how much?

A percentage of net profit? A percentage of gross procedes?

Example: I flip a house for $100k and net $20k in 3 months. How much UBTI in this deal?

thanks

Don

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