Refinancing UBTI Questions.

6 Replies

Hello BP,

What are you tax consequences on below situation purchasing property under Checkbook LLC.

Purchased owner financing commercial property with 2 partners (33% ownership each) for $1,250,000 with down payment of $200,000. If we incorporate BRRRRstrategy because property is worth $1,950,000 and bank allows 65%LTV, what would be my UBTI obligation when I refinance?

From my understanding, rental income will be subject to UBTI by income minus expenses and depreciation. Is that correct?

Thank you,

Tosh

You haven't stated:

(1) whether you're holding your checkbook LLC interest through a Solo 401(k), SDIRA, or some other tax exempt entity.

(2) whether the cash from the refi will be distributed from the partnership (i.e. debt-financed distribution) or kept in the partnership and reinvested.

For a property with a FMV of $1,950,000, onboarding a tax professional who has a solid understanding of partnership tax law, UBTI, and UDFI may keep you out of trouble.

@Toshiki Hoshino

$200k/1250k is your LLC equity in the property 16% thus 84% debt.
Thus 84% of the depreciation can be deducted plus $1000 Against the income which will be taxed at trust rates o15% up to $15k and 37% above approximately $15k. 

Only the acquisition indebtedness should affect the UDFI calculation (debt used to acquire and/or improve the property).

What your tax liability will be requires an in depth analysis into the numbers. But you are right in general that you take income less expenses and depreciation to calculate the gross income.

An IRA is taxed like a trust, which can quickly get up to the 37% tax bracket with UDFI. So that is something to be aware of.

I think @Eamonn McElroy is asking the right questions. But more importantly, hire a tax professional.

Thank you all for your response  and I will check with accountant! Am I correct of understanding that there is no UDFI/UBTI on increase of property for refinancing or if we sell the property for profit? Just on the net rent income? 

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