Comments on: Unrelated Business Income Tax – UBIT for Solo 401(k) & IRA accounts

By: Jeff Nabers

Jeff Nabers — Mon, 11 May 2009 14:45:08 +0000

Actually seller financing does undo the UBIT exemption for qualified plans (including the Solo 401k), but it was recently brought to my attention that that lack of exemption doesn’t apply to seller financing with “reasonable terms”.

By: Thom

Thom — Sun, 10 May 2009 19:29:33 +0000

Thanks for the above clarification! I noticed it said,”type 2 ubit GENERALLY does not apply”-and I was left “scratching” my head again. Just to be sure…if in the solo k you obtain SELLER financing for real estate as opposed to a bank loan…..would this change UBIT either??

By: Jeff Nabers

Jeff Nabers — Thu, 19 Feb 2009 22:52:32 +0000

It’s pleasing to see investors pursue a thorough self education. I hope that over time more investors will follow your lead.

By: Bob Smith

Bob Smith — Thu, 19 Feb 2009 22:49:43 +0000

I’m just a knowledgeable investor, not an attorney.

By: Jeff Nabers

Jeff Nabers — Thu, 19 Feb 2009 21:26:32 +0000

Bob,

Thanks for the input. There are too many possibilities of investment transactions and assets to cover in a single blog post. So this post focuses on real estate.

Also, in an effort to break things down to simple terms that are easy to understand, I use the term “LTV” in the sense that mortgage companies consider the purchase price of the property to be the “V” rather than the actual value.

For non-recourse mortgage loans provided by a bank, the scenario of having a loan of 100% of the purchase price is not realistic as 65% – 70% is typically the maximum.

Thanks for your attention to detail. If I ever write a post about borrowing money to invest in assets other than real property, I’ll be sure to acknowledge that the UDFI exemption for qualified plans doesn’t apply.

Are you an attorney? CPA? Do you practice in this field?

By: Bob Smith

Bob Smith — Thu, 19 Feb 2009 20:48:58 +0000

While 401k accounts are exempt from UDFI on leveraged real estate, they are not per se exempt from UDFI. For example, borrowing money to purchase a mortgage or lend money, which would otherwise produce kosher income, generates UDFI. You have to form a REIT to avoid income tax on such borrowings.

Also, depending on what you mean by “loan to value”, UDFI could be paid on a lot more than 65% of a property’s net income. If you buy cheap enough, 65% LTV could be 100% of purchase price, which means 100% of net income is taxable.