NAFEP Self Directed IRA Blog

The receipt of rental income is considered to be passive income and therefore not subject to UBTI. However, some self directed IRA owners fall into the trap of thinking that this means that they can buy and sell properties on a routine basis (i.e. flipping), and that this would not be active income or running a business.

Even though there are not any bright lines as to when buying and selling real estate through your self directed IRA would constitute UBTI, the general guidelines will be based facts and circumstances. Some of the factors that would be used to determine if the real estate transactions would meet the requirement for UBTI are:

• The purpose for which the property was acquired
• The frequency, continuity and size of sales
• The extent of improvements
• The activities of the owner in improving and disposing of the property
• The purposes for which the property was held
• The proximity of purchase and sale (i.e. how close together were the transactions)

In general we advise clients that flipping or turning one property may or may not meet the UBTI standard. However, if you show a routine pattern of buying and selling property and if there appears to be the intent of turning properties for profit, then you will most likely be subject to UBTI.

For more information on self directed IRAs go to:

www.iracentral.com

www.nafep.com

There are cases where the self directed IRA owner is a real estate agent and they want to earn a commission from selling property to their IRA or some other disqualified party’s self directed IRA. Such a transaction would be viewed as conducting a transaction with your IRA or receiving an indirect benefit. Either way, it would be considered a prohibited transaction.

Another common scenario is that someone is a good money manager or investment guru type and they want to bring in or combine several family member’s IRA account and manage it as a pool. In exchange, the money manager (a related and disqualified party) wants to earn fees or commissions from their activities. In this case the money manager is a disqualified party, and they receiving a direct benefit from the IRA accounts of disqualified persons. This clearly would not be allowed.

A disqualified person can be paid reasonable fees and expenses for providing services to the IRA. Such an example could be that your spouse is a CPA and your self directed IRA LLC hires your spouse to do tax work. There are not any clear lines as to what constitutes reasonable. So, our position on any transactions with any disqualified party is just don’t do it!

As tempting and harmless as some of these transactions appear to be, we feel its better to steer clear of having to potentially defend your actions in the event of an audit.

These scenarios and opinions expressed above are for informational and educational purposes and are not intended to be an exhaustive list of scenarios. If you feel your situation may have an exception or you require a more definitive opinion then you should contact your personal tax advisor.

To learn more about self directed IRAs go to:

www.nafep.com

www.iracentral.com

UBTI is the tax that levels the playing field for tax exempt entities that invest and compete against businesses that pay taxes. Self directed IRA account owners find unique business or investment opportunities in small businesses. Even though the opportunity is compliant and reasonable, and the IRA is passively invested, this does not necessarily mean that that the self directed IRA is not engaged in an active businesses.

Regardless of how involved the self directed IRA account owner is in the business, the business is active and it is competing against other businesses that are required to pay taxes. As such, the IRA would be subject ti UBTI tax regardless of the account owners involvement in the business.

To learn more about self directed IRAs go to:

www.nafep.com

www.iracentral.com

One of the key tenets of self directed IRAs is there is a specific list of persons and entities which are prohibited from interacting with your IRA. This leads people to believe that if you are not on the “list” (IRC 4975), then any transaction would be allowed, but is not really the case.

As the IRA owner you have a fiduciary responsibility to act in the IRAs best interest. Therefore, giving a loan to a friend or brother or sister below market rates, or with no interest or terms could be deemed a prohibited transaction.

Siblings are not automatically on the disqualified list, but entering into a transaction that would cause a conflict of interest due to the close relationship, could be deemed a prohibited transaction.

Additionally, agreeing to enter into a transaction due to coercion (e.g. sister tells you that she is going to tell your parents to change their Will if you do not give her a loan) could be deemed a prohibited transaction if your IRA engaged in the transaction.

Agreeing to enter into a transaction with an unrelated, non-disqualified party, in exchange for some personal benefit (e.g. agree to a loan or to fund a business and agree to receive some personal stake or interest for making the loan), can be a indirect benefit and could be deemed a prohibited transaction.

Not acting in the best interest of the plan could result in a prohibited transaction regardless of who you are dealing with

To learn more about self directed IRAs or IRA custodial services go to:

www.nafep.com

www.iracentral.com