When does flipping homes in a SD IRA create UBTI?

Question

I am reading mixed things online about the tax implications of flipping homes inside of a self-directed IRA. When is a non-financed house flip inside of a SD IRA or Solo(k) subject to UBIT? Is one flip ok? One flip per year? Multiple flips? What if you are primarily a house flipper vs working primarily in an unrelated business? Is there any case law for this? What sections of the tax code or IRS guidelines are you relying on?

@Brian Eastman @Dmitriy Fomichenko @George Blower

Dmitriy Fomichenko · Answer

I wrote an article few years ago on the subject, you may find it helpful: https://www.biggerpockets.com/member-blogs/2810/54795-using-solo-401k-or-self-directed-ira-to-flip-a-house

Dmitriy Fomichenko · Answer

@Scott Jensen

Retirement accounts are designed to invest passively for retirement. Any income/gains from an active business would result in UBIT. Income from flipping generally would not be considered "passive" but "active" income. Therefore will be subject to UBIT. In addition you have to look at other investments of the IRA. For example: IRA owns couple rentals, did few private loans and a single flip - you might be able to get away from UBIT. However, if your IRA did 3 flips in a year, and that is the only activity of the IRA - this is certainly looks like unrelated business income. If the IRA owner flips full time as a business - that could make a difference for the first scenario also. This is just my opinion, I'm not a CPA. It is crucial that each IRA owner discuss his strategy with his own tax advisor, based on his specific situation.

Scott Jensen · Answer

@Dmitriy Fomichenko Thank you for the response and for the article.

The tax code never ceases to amaze me. It's crazy that something that is ALWAYS treated as active income subject to self employment taxes and ordinary income tax rates can be treated as a passive investment inside of a retirement account. Really, that is incredible.  Thanks again for your input and the article.