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Self directed Solo 401K


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#16 randian

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Posted 16 November 2008 - 05:51 PM

I am moving forward with this (not just because of the UBIT exemption). I'll let everyone know if I run into any challenges!

Nothing is clarified. I am not convinced that UBIT is exempt. Nothing in the tax codes cited by either you or randian leads me to that conclusion.

What was unclear? I'm not saying that UBIT is exempt, I'm saying that rental and capital gain income from real property acquired with non-recourse debt is not UBIT to a 401k.

While you are at it, get an opinion on the same investment strategy within a self-directed IRA. If real estate investment is a permitted activity within the IRA, I don't see a UBIT issue there either. A professional IRA custodian would be the best person to ask this question. I am sure it has come up many times before.

IRAs aren't qualified plans under section 401 so they don't qualify for the acquisition indebtedness exemption. It's a section 401 exempt trust (described in section 408), but it's not a qualified plan.

#17 Dawn_LongIsland_NY

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Posted 16 November 2008 - 11:35 PM

While you are at it, get an opinion on the same investment strategy within a self-directed IRA. If real estate investment is a permitted activity within the IRA, I don't see a UBIT issue there either. A professional IRA custodian would be the best person to ask this question. I am sure it has come up many times before.


According to all of the self-directed IRA folks I spoke to, they all said the IRA would be subject to UBIT if they leveraged a flip or a buy and hold rental purchase. Both the self-directed IRA and Solo 401k are only allowed to get non-recourse loans. Or I guess I should say more accurately, getting a recourse loan where I personally guarantee the note instead of just having it guaranteed by the property is a prohibited transaction for both the IRA and 401k, and would/could trigger the distribution of funds and associated disqualification and penalties just like any prohibited transaction in those entities.

#18 Dave T

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Posted 17 November 2008 - 09:07 PM

No, non-recourse debt is debt where the lender can only look to the secured property for repayment, rather than you personally.

Yes this is correct as far as the lender's recourse is concerned. However, when you get a non-recourse loan, the amount of the loan will be limited by the income the property generates. Talk to your favorite commercial lender if you need more specific details. Since the indebtedness is limited by the income generated by the property, the non-recourse loan is acquisition indebtedness under an IRC 514 ( c )(9)( B ) exception.

Since this section of the tax code deals with UNRELATED business indebtedness, the whole question is moot if the real estate activity is a permitted investment activity within the 401k charter.


What was unclear? I'm not saying that UBIT is exempt, I'm saying that rental and capital gain income from real property acquired with non-recourse debt is not UBIT to a 401k.

You got off track early in the tread. No one ever said UBIT is exempt. I believe we all agree that it is not. The question that was asked was whether UBIT would be due if the 401k obtained a loan on a property. You said that it would not and cited a section of the tax code for charitable organizations as your authority -- Section 511. When I asked you for clarification, you cited sections of the tax code from section 511 and my responses to you attempted to show you where your interpretation was flawed, even though Section 511 had no bearing on the original question.

Dawn referred us to Section 514 of the tax code which dealt with how the income from an unrelated business activity is treated when that activity is financed with UNRELATED debt. I tried to show Dawn that this section of the tax code simply says that if there is unrelated debt which financed an unrelated business activity, the unrelated business income is going to be taxed.

I don't see anything in the tax code sections you cited says that unrelated business income is exempt from UBIT if the 401k is engaged in an unrelated business activity. In fact, the tax code sections you cited did tell me that UBIT would still be due even when the unrelated business income is earned by a tax-exempt charitable otgainziation.

Remember for UBIT to be due, the activity must be engaged in an UNRELATED business activity. My response to Dawn is to make sure that her intended real estate investment activity is a permitted activity within her 401k so that the income from that activity is not UNRELATED.


IRAs aren't qualified plans under section 401 so they don't qualify for the acquisition indebtedness exemption. It's a section 401 exempt trust (described in section 408), but it's not a qualified plan.

I don't know why you think I equate an IRA to a Section 401 qualified plan. All I was suggesting is that Dawn is probably misinformed when she initially said that non-recourse debt within an IRA would be subject to UBIT. Dawn's latest response confirmed that non-recourse debt probably avoids the UBIT issue for the IRA if the debt is obtained for a permitted transaction.

Her response tells us that an IRA may now be an available alternative to the solo 401k.

#19 MehulRealty

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Posted 11 January 2012 - 10:52 PM

Solo-401k with the intent to make aprofit..

dont have your CPA do this..have a ATTORNEY! set this up. They will follow the guidelines and regulations.. It is pretty strict and with the laws changing your attorney will be on top of this. I do have a great attoeny in mind ad I do this alot of my investors.




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