UBIT? does it apply 4 SDIRA lending

[Daria B.]

Hi all-

I’ve done quite a bit of reading and searching the forum - some posts came close to my scenario but not on the mark. 

For 3 years I have been JVing with a partner to buy Mortgage Notes (6 plus to 1ur holding) - simple process of funding to buy the Note, receive % split on income and same doing a % split for selling - all proceeds went back to SDIRA. Simple model that works well. No issues like having to foreclose and nothing that required additional funds from IRA.

Now I’ve been presented with a different investment - new for me.

The JV partner already owns the property and has been rehabbed and currently has a renter. All the essentials are in place like insurance, home owners warranty (already rehabbed but carrying as a precaution) and taxes paid. I will have to find out if they expect only renewed taxes and insurance to be SDIRA responsibility.

They currently want to refi and pay off original investor that got them through the purchase and rehab.

In walks my money SDIRA (not a ROTH so all tax deferred) to refi and also partner on holding the investment for rental income.

Anything can happen even though it's rehabbed with a home warranty - all expenses are 100% on the investor side (my IRA) which means if additional money is needed that the rent does not cover, my IRA will have to pay the expense. At this point I see why I never ventured down this path.

Will the IRA be subject to this UBIT or other tax?

I found several posts that get into a more strict and complicated investment and that does not apply here.

Any help is appreciated?

@Dmitriy Fomichenko I know you deal in this and I found several of your posts. Is it a simple cut and dry process with no adverse affect of taxing? What else should I be asking or looking to educate myself on with respect to using my SDIRA to finance (lend) and hold a property for rent?

Thank you all...

[Dmitriy Fomichenko]

@Daria B.

I'm not sure I fully understand this proposed investment... Will you be lending your IRA funds to this person? Will there be a promissory note detailing loan amount and interest paid. Or will you become the part owner of the property? Will your IRA go on title?

If you make passive investment such as private loan - there would not be any issues with UBIT, all income will be sheltered from taxes. If you engage in an active business such as flipping - UBIT may apply, be sure to speak with knowledgeable CPA to understand the tax liability. 

Hope this helps!