TURBO CHARGE IRA
TURBO CHARGE IRA
  • HOME
  • SDIRA LLC
  • SEARCH REAL ESTATE
  • SERVICES
    • SDIRA CUSTODIAN
    • PROHIBITED TRANSACTIONS
    • REAL ESTATE
    • HOME SALE LEASEBACK
    • IRA FINANCIAL TRUST
    • CONTACT US
  • More
    • HOME
    • SDIRA LLC
    • SEARCH REAL ESTATE
    • SERVICES
      • SDIRA CUSTODIAN
      • PROHIBITED TRANSACTIONS
      • REAL ESTATE
      • HOME SALE LEASEBACK
      • IRA FINANCIAL TRUST
      • CONTACT US
  • HOME
  • SDIRA LLC
  • SEARCH REAL ESTATE
  • SERVICES
    • SDIRA CUSTODIAN
    • PROHIBITED TRANSACTIONS
    • REAL ESTATE
    • HOME SALE LEASEBACK
    • IRA FINANCIAL TRUST
    • CONTACT US

Non-Recourse Loans, UBIT and UDFI

Since investments held in an IRA are for the exclusive benefit of the IRA, applying for loans personally or personally guaranteeing loans on behalf of an SDIRA LLC are strictly prohibited. To navigate this restriction, some banks and investors provide SDIRA LLCs with non-recourse loan options, securing the loan solely with the real estate as collateral. 


Typically, rental income from real estate, dividends, investment income, and royalties are exempt from taxes, and these earnings flow back into the IRA tax-free or tax-deferred, depending on the account type. This exemption is a key reason why real estate is popular among self-directed IRA investors.  However, when an IRA utilizes a non-recourse loan to purchase real estate, any profit derived from the portion financed by debt may be subject to Unrelated Business Income Tax (UBIT) and Unrelated Debt-Financed Income (UDFI). This includes the portion of profits attributable to the non-recourse loan's ownership share, which will also be taxed accordingly. UBIT and UDFI are tax concepts that apply to tax-exempt entities such as IRS. Consider the following: 


UBIT (Unrelated Business Income Tax):

  • Tax-exempt entities, including IRAs with significant business income not related to their exempt purpose (such as regular business activities), are subject to UBIT.
  • The rationale behind UBIT is to prevent tax-exempt entities from unfairly competing with taxable businesses. If a tax-exempt entity generates income from a trade or business that is not substantially related to its tax-exempt purpose, that income is subject to UBIT.
  • For IRAs, this typically applies to income from activities like running a business or from debt-financed property (UDFI), which are considered unrelated to the IRA’s primary purpose of providing retirement benefits.


UDFI (Unrelated Debt-Financed Income):

  • UDFI applies specifically to tax-exempt entities, including IRAs, when they use debt to finance the acquisition of income-producing property.
  • The rationale is that income generated from the portion of the property that is debt-financed is considered unrelated to the exempt purpose of the entity. Therefore, this income is subject to UDFI.
  • IRAs commonly encounter UDFI when they invest in real estate or other assets using borrowed funds, such as a mortgage. The income attributable to the financed portion of the property is subject to UDFI.


In 2022, a SDIRA with a non-recourse loan was subject to UBIT and was taxed at the following rates:

  • $0 – $2,550 = 10% of taxable income
  • $2,551 – $9,150 = $255 + 24% of the amount over $2,550
  • $9,151 – $12,500 = $1,839 + 35% of the amount over $9,150
  • Over $12,501  = $3,011.50 + 37% of the amount over $12,500 


In summary, UBIT and UDFI apply to tax-exempt entities to ensure fairness and to prevent these entities from engaging in activities that compete unfairly with taxable businesses or that generate income unrelated to their exempt purposes. For IRAs, understanding these rules is crucial when considering investments involving business activities or financed assets.


As a member, we can provide you with strategies on structuring a new entity to avoid  using non-recourse loans and avoiding UBIT and UDFI. 

SDIRA Custodian: A SDIRA custodian solicits no investments and provides no advice or recommendations to customers with regard to investments, acquired by or held in the IRAs. Learn more about what a SDIRA custodian is able and is not able to do.

LEARN MORE

Prohibited Transactions: Prohibited transaction rules are not about what you retirement plans may acquire, but rather how your investment is structured and whom you are transacting with. Learn more about Prohibited Transactions.

LEARN MORE

Peer-to-Peer (P2P) Lending: Leverage our network to extend loans to other members or to borrow funds to avoid a prohibited transaction.

LEARN MORE

SUBSCRIBE TO OUR NEWSLETTER

We provide regular updates on important SDIRA changes and provide expert guidance on structuring transactions to minimize the risk of prohibited transactions.

Disclaimer: The information provided herein is for educational and informational purposes and shall not be construed as financial advice.


Copyright © 2025 Turbo Charge IRA LLC - All Rights Reserved.

Turbo Charge Your Retirement Today!

  • CONTACT US

This website uses cookies.

We use cookies to analyze website traffic and optimize your website experience. By accepting our use of cookies, your data will be aggregated with all other user data.

Accept