Self Directed Roth and Unrelated Buisness Income Tax

[Guest TNpropertyinvestor]

I am directing my Roth Ira to invest in real estate and have been hit with my first major tax stumper. I am buying a investment property through my Roth for 45K. I plan to give 35K from Roth funds and they will hold a non recourse promissory note for the 10K which debt will be in the name of my IRA. The note simply states i have 1 year in which to pay back the debt and there is no interest involved. I have someone who will purchase this home from me for 65K in 90days giving me a capital gain of 20K. I need to know if there will be any UBIT (unrelated buisness income tax) involved in this transaction. At no time will i use any money other than that which is in my IRA account. The 10k prommisory note will be paid with funds from a future sale of a current asset before i sale this one. Unfortunatley my Custodian will not give me any information and the CPAs and Attorneys in my area are not equiped to anwser my question. Can anyone enlighten me??

[Guest TNpropertyinvestor]

i have come to find that i do have unrelated buisness taxable income that i will be paying to uncle sam..However...my custodian told me today that all my capitol gains, minus the UBIT that i occurred from debt financing this property, stays in my ROTH and continues to be tax free. it seems to me that the portion of capitol gains that relates to the percentage of debt financed needs to be pulled out...if it is possible to keep this portion tax free then i believe everyone would have a self directed ROTH....opinions??

[No Name]

No relation to this company, but have found some useful info on their website in the past.

Pensco.com

[Guest TNpropertyinvestor]

i had a self managed account with pensco and moved it to my current Trust Company for they give me total control of self investments. The above scenario is very interesting because if in fact my Custodian is correct, then this additonal portion of the capitol gain would greatly increase my buying power. I was contacted by the IRS this evening and submitted my situation for revue to get a correct anwser. I do not feel comfortable with the advice i have been given by CPA, Attorney,Custodian so i want to hear it from the horses mouth. If they give an opinion letter i will post it.

[Guest TNpropertyinvestor]

All opinions will be appreciated

[Guest Fishchick]

Can someone explain how the $10K promissory note on the IRA does not create a prohibited transaction? My understanding is that using IRA assets as security for a loan is a prohibited transaction. I'm assuming that the note holder is claiming security on the remaining IRA assets (including the home).

Also, assuming you own the home on 12/31, you would need an appraisal for the 5498 Fair market valuation as of 12/31.

[Guest TNpropertyinvestor]

IT IS NOT PROHIBITED FOR A SELF MANAGED ROTH IRA TO TAKE ON DEBT, I HAVE HAD SEVERAL TRANSACTIONS WHERE MY ROTH HAS USED DEBT FINACING TO ACQUIRE REAL ESTATE. THE FINANCING HAS TO BE NON RECOURSE, MEANING THEY CAN NOT GO AFTER OTHER ASSETS OF ACCOUNT HOLDER, IT IS VERY RARE THAT YOU RECIEVE THIS KIND OF FINANCING FOR WHO WOULD WANT TO BE AN UNSECURED CREDITOR,BUT IF YOU HAVE SOMEONE WHO IS VERY WILLING TO SELL SOMETIMES YOU CAN GET THIS DONE. ALL OF THE OTHER TRANSACTION THAT I HAD DEBT FINANCING,THE DEBT WAS PAID OFF AND THE PROPERTY HELD FOR AT LEAST AN ADDITIONAL YEAR AFTER PAYOFF SO I DID NOT HAVE TO FILE NOR PAY ANY UBIT. MY QUESTION ABOVE IS THIS: ONCE YOU FIGURE THE AMOUNT OF UBIT THAT YOU ARE REQUIRED TO PAY BECAUSE OF THE DEBT FINANCING THAT WAS MADE ON THE FRONT END OF THE PURCHASE, DO YOU HAVE TO TAKE OUT THE REMAINING PORTION OF CAPITOL GAINS(THE PART THAT RELATES TO DEBT FINANCED INCOME AFTER TAXES)OUT OF THE ROTH. ARE YOU ALLOWED TO SHELTER THIS PORTION TAX FREE. MY CPA SAYS YES, CUSTODIAN SAYS YES, IRS SAYS YES, BUT WHY??? IT HAS NO LOGIC BEHIND IT. I AM ALL FOR IT BUT DO NOT UNDERSTAND WHY THIS PROTION IS ALLOWED TO BECOME PART OF THE ROTH ACCOUNT AND REMAIN TAX FREE.

THE CUSTODIAN OF THE SELF ANAGED ACCOUTN IS REQUIRED TO FILE THE FORM 5498, AN APPRAISAL IS NOT NEEDED, USUALLY THE TAX RECORD OR THE SALE AMOUNT OF THE PROPERTY IS THE FAIR MARKET VALUE.

I WOULD LIKE TO GET MORE OPINIONS ABOUT THIS TOPIC IF ANYONE HAS ONE. THANKS FOR RESPONDING FISHCHICK

[Mary Kay Foss]

If you have a UBIT situation, the tax itself should come out of the IRA but the profit remains inside. I have never seen any situation where it was suggested or required that the IRA be depleted due to Unrelated Business Income.

The problem that I have run across is where the IRA owner pays the UBI tax with personal funds, this could be treated as an excess contribution to the IRA. There were posts in this forum on a semi-related question that indicated that if the IRA owner paid someone outside the IRA to do the Form 990-T that an excess contribution would occur.