I watched the UBIT video but still confused.
I am looking to grow my HSA and Start my Coverdell accounts for my two girls.
If I assign my option out of those type of accounts do I pay UBIT or not and if so at what rate?
You ask a very good question, to which there is no easy answer. First, let me remind you that neither Quest IRA, Inc. nor I can provide you with any tax, legal, investment or structuring advice. I’m just providing you with some thoughts to consider. You should always ask your tax, legal or investment advisor beforing entering into any type of transaction.
So, one good piece of news is that it does not appear like there is a lot of audit activity for Coverdells and HSAs. However, the same rules apply to them as the IRAs, so you still have to play by the rules.
As a Homevestors franchisee you are probably going to be more likely to get into trouble if they audit the account that other people, simply because your business is flipping houses. This presents you with some extra challenges. For example, did you use your personal resources and staff to get that lead? My guess is yes. So they might call that at best an excess contribution, or they may call it UBTI (more on that in a minute), or in the worst case scenario they might call it a prohibited transaction (directly or indirectly providing services between a plan and a disqualified person).
The reason you might owe UBIT on the transaction has to do with your intent when you got the property under contract or option. Was it your intent to flip that contract or option? It would seem so based on your question. If that’s true, then the contract or option could be considered as “inventory held for sale to customers in the ordinary course of business.” Much like the houses you buy and sell are inventory for you as a Homevestor and not a capital asset (an investment), the same could be said of the contracts or options you run through your HSA or Coverdells.
Unfortunately, there is no way to predict who will be audited or when. Some people are more tolerant of risk than others. A recent tax court case which dealt with an IRA investing in a Foreign Sales Corporation went the wrong way for the taxpayer because the Tax Court found that the IRA had essentially nothing at risk (around $100) and therefore should be taxed to the taxpayer instead of being tax free in the IRA. Not the same thing, exactly, but they were trying to get out of paying taxes on over $523,000 in income. One thing we can say for sure is that piglets get fed, but hogs get slaughtered. If you are going to do something a little on the edge, don’t be greedy and do it over and over again. Try to make other investments within the account so it doesn’t look like all you’re doing is flipping contracts or options as a business.
That should at least help to frame the issue for you. Sorry I don’t have any hard answers. Thank you for your question, and have a great day!