Posted by John K Haslach, CPA, MST on September 18, 2005 at 10:29:58:
Rents from real property are generally excluded from computing Unrelated Busienss Taxable Income. One exception is if the property is debt financed.
giving hard money participating loans from 401(k) - Posted by Lionel
Posted by Lionel on September 15, 2005 at 11:20:01:
Here is the scenario: a non-cash field manager finds a house to rehab and sell retail. I use my self directed 401(k) to make a short term hard money loan to the field manager to buy the house, including a profit sharing for me and the field manager. When she finishes the project, she pays off my hard money loan. This would put loan points, a little interest and equity from the participating note into my 401(k). Will this arrangement work (legal) and avoid UBIT in the 401(k)?
completely legal - Posted by John Merchant
Posted by John Merchant on September 17, 2005 at 19:04:27:
This is exactly the investment process used by lots of people through their SDIRAs (self directed IRAs)and not taxable, and is not a generator of any UBIT.
If the 401k bought the RE, which is could legally do, then rented it, THAT rental income would be subject to UBIT as it would be considered business income.
401(k) loans & UBIT - Posted by Tim (NC)
Posted by Tim (NC) on September 17, 2005 at 08:35:54:
I am currently buying property using a self directed IRA. What you are describing is not subject to UBIT because you are purchasing the property and not using your 401(k) to leverage OPM for the property. Since this is a loan, there is no “profit” from the sale of the house that you can put back into your account. The money that you can put back into the account would need to be described by you in the loan paperwork as origination fees, interest, baloon payments. I have my account with Equity Trust and have had discussions with them on this topic. May be good to call your custodian if there are still any questions.
what about participating part? - Posted by Lionel
Posted by Lionel on September 19, 2005 at 12:21:26:
I understand the interest and points are okay. What about the participating part of the mortgage? For example, as the lender I may want to receive 30% of the net profit from the sale of the house. Would this be considered UBIT, even though it is structured within a participating mortgage?