I am looking into possibly getting into wholesaling empty townhome lots in St Cloud, FL with my SD IRA LLC. Has anyone had any experience with this? Has it triggered UBIT ( Unrelated Business Income Tax) for you? Did you have to apply for any permits to do this? Any insight would be greatly appreciated! Thank you so much in advance!
I am looking into possibly getting into wholesaling empty townhome lots in St Cloud, FL with my SD IRA LLC. Has anyone had any experience with this? Has it triggered UBIT ( Unrelated Business Income Tax) for you? Did you have to apply for any permits to do this? Any insight would be greatly appreciated! Thank you so much in advance!
Check with your CPA but wholesaling is not a passive activity and therefore is almost certainly going to trigger UBIT. There are different schools of thought about what services a disqualified party can provide pre-acquisition and post acquisition. If you could figure out a way to wholesale using 3rd party individuals that would probably be best.
I am looking into possibly getting into wholesaling empty townhome lots in St Cloud, FL with my SD IRA LLC. Has anyone had any experience with this? Has it triggered UBIT ( Unrelated Business Income Tax) for you? Did you have to apply for any permits to do this? Any insight would be greatly appreciated! Thank you so much in advance!
Check with your CPA but wholesaling is not a passive activity and therefore is almost certainly going to trigger UBIT. There are different schools of thought about what services a disqualified party can provide pre-acquisition and post acquisition. If you could figure out a way to wholesale using 3rd party individuals that would probably be best.
What do you mean by wholesale using 3rd party individuals?
You and your immediate family are disqualified parties to your retirement account. Part of what that means is that you can't "provide services" to the plan. Basically white collar is ok, blue collar is not. So what I meant is hire out the work for wholesaling so you don't accidentally commit a prohibited transaction which will result in distributing the IRA. Best to just not wholesale in your retirement plan.
Attorney · Spanish Fork, UT · Member since 2025 · 77 posts · 97 votes
7mo
You should work closely with a qualified professional who knows their way around SDIRA investing as there are numerous pitfalls that you need to be aware of.
UBIT First, as you and others mention, there is a UBIT problem with Wholesaling. As an active income generating activity that is generally seen as an "active trade or business" instead of as "passive investment activity". Because of this, wholesaling in your SDIRA will almost certainly be hit with UBIT which very quickly (at $16,000 worth of income) rises to a whopping 37% tax. Thus, your tax exempt IRA is now getting killed on taxes.
Prohibited Transactions The other major issue here is that of prohibited transactions. If you are personally engage in the wholesaling activity then these are almost certainly prohibited transactions as you are providing a financial benefit to the IRA (personally performing valuable services to the IRA). Prohibited transactions are far more catastrophic than UBIT because engaging in such prohibited transactions effectively blows up the IRA as the IRA would be completely disqualified. This means that the IRS would consider you to have withdrawn the entire amount of the IRA causing you to get hit with taxes and penalties on the entire amount of the IRA. In other words, you no longer have an IRA.
Now the primary way around the prohibited transaction problem is to be hands off on the wholesaling activity, instead hiring a third party to engage in the wholesaling activity in your IRA's behalf. This prevents you from providing a financial benefit to the IRA and thus not blowing up the IRA via prohibited transactions. Keep in mind that this third party cannot be another prohibited party (e.g. grandparents, parents, spouse, children, children's spouses, grandchildren, grandchildren's spouses, business partners, etc.).
It's also worth noting that while hiring a third-party can resolve the prohibited transaction issue, it will not solve the UBIT issue.
As you can see, these types of activities in your IRA can get very messy and my overview here is just the tip of the iceberg. Thus, it is incredibly important to work with a qualified professional with specific experience and expertise with SDIRAs and Solo 401ks when using these vehicles to invest into any alternative investments or activities.
Note: This information is for
educational and informational purposes only and does not constitute legal,
tax, or financial advice. No attorney-client, fiduciary, or professional
relationship is established through this communication.
Thank you Ryan for your in depth words of caution and to everyone who responded to my post! I appreciate you all taking the time to help me avoid the land mines.
CPA| New Clients Welcome| 50 States · Member since 2016 · 430 posts · 93 votes
7mo
Hi @Tina Swanson, Wholesaling through an SD IRA LLC can trigger UBIT if the activity looks like an ongoing trade or business rather than a passive investment, especially with frequent deals. If leverage is used, UDFI may also apply.
You also need to avoid prohibited transactions, no personal guarantees, no providing services, and no material participation.
Before proceeding, it’s important to evaluate deal frequency, structure (assignment vs. double close), financing, and your level of involvement, since proper setup upfront is critical.