Short holds in SDIRA and what is considered a "business"?

Tax, SDIRAs & Cost Segregation
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Short holds in SDIRA and what is considered a "business"?

Chris Martin
Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes

It looks like "flips" in a SDIRA are subject to UBIT. But rental income is not subject to UBIT. What about gains on the sale of rental property? From http://www.nuwireinvestor.com/howtos/how-to-keep-your-self-directed-ira-healthy-and-the-irs-51470.aspx

"The government requires that all businesses in the U.S. pay taxes. If any business sells some or all of its products or services without paying taxes, it would have an unfair advantage over its competitors. For this reason, UBIT could be triggered if your IRA owns all or part of a business that earns its income through the sale of a product or service. Flipping real estate and developing land for resale are examples of investments that are, more often than not, considered "businesses"—which makes profits generated by such activities fair game for taxation." David Nilssen, co-founder and CEO of Guidant Financial Group, Inc.

So, if the SDIRA holds a rental property for, say, two years and then sells the property for a gain... is UBIT due on the gain? What about one year? What if the property is sold with seller financing to the tenant after 18 months? 6 months? Does 'intent' play any role in what is considered a "businesses" to the IRS? Any insight appreciated.

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Account Closed
Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
15y
Originally posted by Chris Martin:
... rental income is not subject to UBIT. What about gains on the sale of rental property?

Gains on the sale of rental property may or may not be subject to UBIT. It is primarily a question of intent. This is very similar to the dealer vs investor question.

The biggest problem is that as the taxpayer the burden of proof is on you.

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  • Chris Martin
    OP
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    15y

    I had a couple conversations with Equity Trust Company (ETC) on this, subsequent to my post. Basically, ETC will send a letter at the end of the year if they feel your SDIRA activity warrants UBIT or any IRS filing. They can do the filings on your ETC account's behalf. Regarding the topic, the ETC representative seemed to think unleveraged IRA purchases/sales of less than 5 properties in a year would not be considered a "business" activity and not subject to UBIT. The five properties relates back to the dealer definition and context.

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  • Bryan Hancock
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    15y

    There are legal opinions about this if you look in the right spots. American Pension Services posted an article on this several years ago and it is murky as is anything with the IRS. I tried accessing the article again today and it is no longer accessible:

    This is the old link:

    https://americanpension.com/cms_asset/path/93/Second_Quarter_09_Newsletter.pdf

    You may call APS and see if they will send you a copy.

    If you are doing this repeatedly my suspicion is that it will be treated as a business by your accountant. A few times....eh...you can probably get away with that.

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  • Bryan Hancock
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    15y

    Do any of our new tax wizards have an opinion on this thread?

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  • Account Closed
    Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
    15y
    Originally posted by Chris Martin:
    ... rental income is not subject to UBIT. What about gains on the sale of rental property?

    Gains on the sale of rental property may or may not be subject to UBIT. It is primarily a question of intent. This is very similar to the dealer vs investor question.

    The biggest problem is that as the taxpayer the burden of proof is on you.

    1Reply
  • Ebere Okoye
    Accountant · Hyattsville, MD · Member since 2011 · 120 posts · 44 votes
    15y
    Originally posted by So, if the SDIRA holds a rental property for, say, two years and then sells the property for a gain... is UBIT due on the gain? What about one year? What if the property is sold with seller financing to the tenant after 18 months? 6 months? Does 'intent' play any role in what is considered a "businesses" to the IRS? Any insight appreciated. [/quote:

    Here is my take on this issue;

    Any property held to produce income is debt-financed property if at any time during the tax year there was acquisition indebtedness outstanding for the property. When any property held for the production of income by a tax-exempt organization or IRA or Roth IRA is disposed of at a gain during the tax year, and there was acquisition indebtedness outstanding for that property at any time during the 12-month period before the date of disposition, the property is debt-financed property. In general, average acquisition indebtedness for any tax year is the average amount of the outstanding principal debt during the part of the tax year the property is held by the entity or IRA.

    The amount of gain or income taxable as UDFI for any tax year is the total income, multiplied by a fraction. The numerator is the average amount of acquisition debt, and the denominator is the average of the adjusted bases at the beginning and at the end of the year.

    So having debt plays more role in calculating UBIT/UDFI compare to intent/holding period. As long as the IRA "PURCHASED" the property with some kind of debt. It does not matter "HOW" the property is "SOLD" to the tenant (seller financing, out right, wrap around, etc)

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    15y

    I'm just re-posting the previous post with fix for broken quoting - to make it readable (I couldn't read in my browser otherwise).

    Originally posted by WBCPA:
    Originally posted by Chris Martin - broken quoting fixed here:
    So, if the SDIRA holds a rental property for, say, two years and then sells the property for a gain... is UBIT due on the gain? What about one year? What if the property is sold with seller financing to the tenant after 18 months? 6 months? Does 'intent' play any role in what is considered a "businesses" to the IRS? Any insight appreciated.

    Here is my take on this issue;

    Any property held to produce income is debt-financed property if at any time during the tax year there was acquisition indebtedness outstanding for the property. When any property held for the production of income by a tax-exempt organization or IRA or Roth IRA is disposed of at a gain during the tax year, and there was acquisition indebtedness outstanding for that property at any time during the 12-month period before the date of disposition, the property is debt-financed property. In general, average acquisition indebtedness for any tax year is the average amount of the outstanding principal debt during the part of the tax year the property is held by the entity or IRA.

    The amount of gain or income taxable as UDFI for any tax year is the total income, multiplied by a fraction. The numerator is the average amount of acquisition debt, and the denominator is the average of the adjusted bases at the beginning and at the end of the year.

    So having debt plays more role in calculating UBIT/UDFI compare to intent/holding period. As long as the IRA "PURCHASED" the property with some kind of debt. It does not matter "HOW" the property is "SOLD" to the tenant (seller financing, out right, wrap around, etc)

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