Hi,

I have a self directed solo 401K, and am wondering if the following business model will generate UBIT.  I will ask my lawyer/CPA as well, but want to see what BP community thinks.  Here is the model -

• My 401K trust (has an EIN) and an asset manager (individual, not an entity) form an LLC, and the 401K Trust funds the LLC.
• With the manager's help, the LLC buys a property, say for $30K, and retains the title of the property.
• The LLC finds a contractor to fix it up.
• The LLC sells the fixed-up property to a buyer for $50K, netting $20K profit.
• The LLC pays the contractor $10K for its service.
• The LLC and the asset manager each gets $5K as equal partners of the LLC.

Will the $5K profit from the deal generate UBIT for my 401K trust?

I think if the trust directly buys and sells real properties, the trust will not have UBIT. If the gain/profit is generated from a business that the 401K trust invests in, I think UBIT applies. However, what I am not clear is that with the above model, the profits is from a pass-thru entity, the LLC, therefore it will not have UBIT for the trust? Or, if the $5K is distributed to its members (the trust and manager) as dividend, then UBIT won't apply?