Owner Finance = Debt in SD IRA?

4 Replies

I understand the general concept of UDFI in a SD IRA and I've searched some boards to see if this has been discussed, but alas here we are.

If Mr. X approached seller Y about Property and seller Y said "I'll sell you this and finance it.  You bring $10k and I'll owner finance the rest."  Seller Y is very flexible in structuring and trusts Mr. X. 

Is this a situation that could lead to Mr. X's Self Directed IRA account owning the property and NOT owing UDFI?

@Will Fraser

The structure you outline will still generate Unrelated Debt-Financed Income (UDFI) for the IRA borrower. Debt-financing is debt-financing, whether the loan is from a bank or an individual.

The principle here is that the IRA is receiving income attributed to the non-IRA (borrowed) money. That fraction of income is taxable to the IRA.

Originally posted by @Brian Eastman :

@Will Fraser

The structure you outline will still generate Unrelated Debt-Financed Income (UDFI) for the IRA borrower. Debt-financing is debt-financing, whether the loan is from a bank or an individual.

The principle here is that the IRA is receiving income attributed to the non-IRA (borrowed) money. That fraction of income is taxable to the IRA.

That clarifies it for me!  Thank you!

IF the loaned money came from another IRA would that be an issue? Say Joe has an IRA that loans the money for Bobby's IRA to purchase a rental home. Would that payback be considered UDFI?