Tag Archives: retirement planning

UBIT? You Bet!

Questions:

I think the answer to my question. Does Arkansas charge tax on UBIT and UDFI?

in the book 2009 Multistate Guide to Regulation and Taxation of Nonprofits By Steven D. Simpson. Which is found in full online through google books at:

https://books.google.com/books?id=KE5dVpNcWkwC&pg=SA3-PA9&lpg=SA3-PA9&dq=Section+512+of+the+Internal+Revenue+Code+arkansas&source=bl&ots=YFNc-ZE7U0&sig=PpYxNwFJEhq5fd920ha18OXLFkw&hl=en&sa=X&ei=ItEKVdmUOcSwggSMiIOoBQ&ved=0CC8Q6AEwAw#v=onepage&q=Section%20512%20of%20the%20Internal%20Revenue%20Code%20arkansas&f=false

It says that Arkansas does not have IRS code sections 501-529, but that it does tax unrelated business income on income attributable to Arkansas. Since UDFI is Section 514 I assume that there is no state income tax on UDFI. I also believe that attributable to Arkansas means the source of the income is physically inside the state.

This book seems to be a source of answers on UDFI and UBIT for all 50 states or at least a starting place.

I still have the following 3 questions from yesterday in a more simplified form:

 

1) If you pay UDFI on the sale of a depreciated rental property do you also recapture depreciation at a 25% rate?

 

2) If my IRA purchases a condo for nightly rental using debt will it owe UBIT on the nightly rental and UDFI on the profit percentage of the debt?

 

3) In the following  published article you state that UDFI is on Acquisition debt. Does this infer that if I pay cash for the house and then borrow against it later there is no UDFI? In other words is UDFI on all debt or just aquisition debt.

 

https://www.questira.com/why-your-ira-may-owe-taxes-to-pay-or-not-to-pay-that-is-the-question/

 

Definition of “Debt Financed Property.” In general, the term “debt-financed property” means any property held to produce income (including gain from its

disposition) for which there is an acquisition indebtedness at any time during the taxable year (or during the 12-month period before the date of the property’s disposal if it was disposed of during the tax year). If your retirement plan invests in a non-taxable entity and that entity owns debt financed property, the income from that property is attributed to the retirement plan, whether or not the income is distributed.

 

 

Answer:

 

Thanks for the reference and the questions yesterday. Sorry we couldn’t get to all of them on the call.  As far as your questions:

1) I believe the IRA would owe this tax, but I have heard different arguments on this. If you think about it, it wouldn’t make sense to be able to deduct depreciation from current UDFI and then escape it on the sale of the property. However, one CPA told me that if the property had been paid off for more than 12 months so there was no capital gains tax then there wouldn’t be depreciation recapture either. I think this was based on the theory that ‘depreciation recapture’ is really another form of capital gains, technically called ‘unrecaptured section 1250 gains.’ To be honest, I just don’t know.

2) That’s a good question. Certainly running a hotel is considered to be a business operation as opposed to just rental income, so I see where you could assume that the nightly rentals would be UBI and not UDFI. I think that if it is considered to be a business operation then probably all income from that business would be UBI not UDFI. I don’t think you can split the capital gains in that case away and call them UDFI, but once again I’m really not that confident, especially this early in the morning. On the other hand, if it were me I would probably just report it as UDFI and see if the IRS disagreed. There is a lot of ambiguity in this area, unfortunately.

 

3) Another good question, but this one I can actually help you with. 🙂 Acquisition indebtedness is 1) when acquring or improving the property; 2) before acquring or improving the property if the debt would not have been incurred except for the acquisition or improvement; or 3) after acquiring or improving the property if (a) the debt would not have been incurred except for the acquisition or improvement, and b) incurring the debt was reasonably forseeable when the property was acquired or improved. So most likely in your scenario the debt would still be considered ‘acquisition indebtedness.’

 

Here is an interesting brain twister: what if my IRA owns a piece of land with no debt which produces no income but which is expected to be sold within a year. If my IRA borrows money to purchase bank stock, which will not be sold for several years, which property is considered debt-financed, the land or the bank stock? If the answer is the bank stock, then can my IRA escape taxation entirely on the gains from the bank stock because the debt will have been paid off from the sales proceeds of the land for more than 12 months prior to the sale of the bank stock?

Using IRA to invest in Laundromat Business?

Question:

I appreciate if you can answer my two questions below:

1- Can I use my IRA and invest in a Laundromat business as my down payment and borrow rest from SBA?

2- Can I buy a 2nd home with my SDIRA?

Answer:

1) Not directly in the IRA, no.  Your IRA is to be invested for your future, not for your current benefit (or to benefit any other disqualified person).  Some people say that you can set up a ROBS arrangement (Rollovers for Business Startup).  This works like this:  a) you set up a C corporation; b) you appoint yourself the sole director and officer; c) you have the corporation adopt a 401(k) plan; d) you roll your IRA into the 401(k) plan; e) you, as trustee of the 401(k) plan, purchase all of the shares of the C corporation; and (f) you hire yourself to run the corporation.  If this sounds a bit complicated to set up and a little expensive, that’s because it is.  The IRS has issued some guidance on concerns it has with ROBS arrangements, so if you go down that path you will need to work with someone who is very knowledgeable about this area and can satisfactorily address the IRS’ concerns.  Investing your retirement money into what is essentially a start up business certainly can be risky.  I would encourage you to do some research on ROBS arrangements and do some soul searching before setting this up.  Many companies offer to set up ROBS arrangements.  One such firm in Houston is DRDA, Inc., www.borsaplan.com.  I am not qualified to make a judgment as to the validity of the structure, so that is something you must decide for yourself.  Good luck!

 

2) Self-directed IRAs do buy real estate all the time.  However, if you are asking can you buy a second home which you intend to use periodically personally then the answer is no, for the same reason the first answer is no.  You cannot either directly or indirectly gain a personal benefit from your IRA’s assets, other than in the form of a distribution from the IRA.

 

Good luck with your investments, and let me know if you have any further questions.

 

Have a great day!

 

The Balancing Act

I traveled to Pompano Beach, FL last week to record a financial segment for “The Balancing Act”, a Lifetime Television show.  A lot of hard work went into this and it went off without a hitch! It was such an honor for me to be on their show, the topic was my personal favorite (and area of expertise), Self-Directed IRAs. I finally got to wear my awesome suit that I have been tweeting about but I wasn’t ready for my lesson on wearing make up and eating spicy food- ha ha!!

See below for the pics And click HERE for the Press Release!

The recording will air on February 19th- Make sure you record your DVRs to watch me appear on National Television!!