UDFI Taxes in SDIRA if Negative Cash Flow Each Year?

[Daniel Dietz]

Hello All, 

I am hoping maybe @Dmitry Formichenko, @Brian Eastman or @Steven Hamilton II might be able to give their input here :-)

I have been investing with my SDIRA for some time and grasp most of the concepts of the accounting needed. I have not yet borrowed funds in a SDIRA (although I have in my SOLO401K which has different rules on borrowing) so have not needed to worry about the UDFI, Unrelated Debt Financed Income Tax, part of the equation. 

One of my investing partners is looking at a deal that just they would be investing in with their SDIRA and using a non-recourse loan and we are trying to figure out the financials of it. 

The summary is that a relative who is NOT a disqualified party to them is will to sell 'the family house' in Sun City AZ to someone in the family at a 33% discount (they are all set income wise and dont really need the cash, no heirs). House valued at 180K per taxes and comps, sell it for 125K including closing cost etc.... 

With the rental market there, loan rates, etc... and using the BP Calculator I am figuring about a 2K per year loss after figuring P&I, taxes, HOA, insurance and maintenance. The allure is the 60K in instant equity in a pretty good market for appreciation too.

So on to the UDFI and taxes. If they finance it using 40% (50K) and borrow 60% (75K) and there is an annual 'loss' of say 2K, I assume that means from a tax perspective they would figure 60% * 2K = -$1200 income that is subject to UDFI, so no UDFI due?

IF this number was positive, I assume that they would then figure depreciation at 60% since that is the amount financed too?

What happens in say 10 years if they sell for 240K as far as UDFI goes? Say there is 40K left on the loan, so they have 200K after paying that off. Original investment was 50K so there is a 'gain' of 150K after the sale. Is there any tax due on that amount while it is still in the SDIRA, or is it the same as if a stock or mutual fund was held and had the gain? 

It *seems* like having a slightly negative cash flow, assuming the SDIRA has the reserves to cover that, would help avoid the UDFI income aspect of things in the short run and still lead to long term gain?

Thanks for any enlightenment :-)

Dan Dietz