Roth SDIRA and UBIT/UDFI

[Jeff P.]

I have a checkbook control Roth SDIRA and plan to invest in multifamily syndication.  I am concerned about how UBIT/UDFI will kick in.  I am new to this so forgive me if I don't present it correctly, but here is a hypothetical scenario:

$50k investment from the Roth SDIRA LLC. The deal would be debt financed at 70% LTV. Typical deal structure of 8% pref, 70/30 split. Held for 5 years and sell at 2X equity multiple.

Would my Roth SDIRA incur UBIT/UDFI tax on the debt financed portion of the equity gain? 

Hopefully my question makes sense.  I would really appreciate help working through this.

Jeff

[Brian Eastman]

@Jeff P.

Yes, because the deal is debt financed, the IRA is incurring UDFI. The tax impact on a typical syndication at a lower investment amount such as $50K will be trivial. The tax might cost you an average of .03% - .05% of the top-line return the deal produces. So if the syndicator is projecting a 13% return, your IRA might see a 12.5% return after paying tax on UDFI and paying a CPA to file the 990-T return that is required. These are generalizations, and be sure to have a CPA on your team review your projections before proceeding, but should point you in the right direction.