real estate investment

[Guest hershey]

We service a sole proprietor's one-man plan, wishing to invest in a real estate property that has rental income. The plan does not have sufficient cash with which to purchase the property outright.

Questions are:

1) If the plan obtains a loan from an unrelated third party, would there be a problem with unrelated business income tax due to the debt financed property? Is there any way to avoid the UBIT?

2) Can the sole proprietor form a "partnership" with the plan, so title would be held by the partnership and each would contribute their respective share of the investment, recognize ongoing gains and losses proportionately until it's sold?

[mbozek]

1. Using plan assets as collateral for purchase of plan assets will create ubit in the year the asset is sold. The UBIT rate is the same as the tax rate for individuals but the max 35 % rate starts at about $9200 of taxable income.

2. The prohibited transaction rules prohibit a fiduciary from using plan assets to benefit the fiduciary's own account. Establishing a partnership with a plan to purchase an asset would be a PT because it would benefit the partners personal account.

[KJohnson]

As to point number 1, this has always been an area where I pull out the statute again and again. I thought that indebtedness used to improve or acquire real estate would not be treated as acquisition indebtedness unless one of the factors in 514©(9)(B) were present (price not fixed at time of aquisition, sale lease back, indebtedness depends on revenue, property is held by a partnership etc). Thus if the plan purchased the entire thing on a leveraged basis, would you have UBTI?