Private REIT in Self Directed Roth IRA Avoids Taxes?

Question

I'm considering investing in two private REITs within a self directed Roth IRA. The specific funds are DLP Lending Fund and DLP Housing Fund. They invest in 1st position real estate investment loans and direct real estate ownership respectively.  I am unable to find any definitive information on if either fund would generate UBTI, UDTI, or any other tax. My accountant is uncertain. My understanding is the REIT structure within a self directed Roth IRA avoids these taxes, but I would like to find a reference or professional to confirm this.  Can anyone point me in the right direction?  Thank you.

Brian Eastman · Answer

@Adam Koch

The answer from @Ashish Acharya is more precise.  I was being more broad, because a lot of investors toss around the term REIT loosely to refer to any private real estate investment entity.  If it is a true REIT then it should be dividend income, not pass through income, and there should be no UDFI concern.

Adam Koch · Answer

Brian and Ashish, thank you for your time and reply. One of the funds will issue a K1. I’m told there is no concern regarding UDFI but I would prefer to hear it confirmed by a third party. It seems like I’m hearing two potentially different answers here. Is there a specific type of professional or CPA I should be searching for who can review the fund documents and clarify the issue for me? My current CPA is not familiar with this area. Thank you again for your help.

Ashish Acharya · Answer

REITs are actually used to block UBTI or UDFI  income for the exempt taxpayers. The distribution from REITs are dividends, not trade or business income.

Brian Eastman · Answer

@Adam Koch

It will depend on specifically how the REIT is structured.  UBTI is unlikely but UDFI could be an issue if debt financing is used in either structure and they are setup as a pass-through issuing a K-1 to the investor.

Check with the fund sponsor.  They should be able to tell you if UDFI is a concern.  If they cannot, they are not sophisticated enough to handle your IRA dollars.