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Leveraging Your IRA UDFI Tax Law & Cases
Statutes
IRC § 514(b)(1). UDFI tax is applied to income from “debt financed property” that is subject to “acquisition indebtedness.” Debt financed property is defined as property held to produce income that has acquisition indebtedness.
IRC § 514(b)(1). Additionally, debt incurred after the acquisition of property is acquisition indebtedness if such debt would not have been incurred without the property and if such debt were reasonably foreseen at the time of acquisition.
IRC § 514(9). 401(k) and other employer plans are exempt from UDFI taxes that arise from debt on real property.
IRC § 514 (9)(C)(ii). The tax code specifically exempts plans which are “qualified trusts” under section 401 from the tax code from UDFI tax.
Internal Revenue Manual, Part 2, 7.27.8.4. Unrelated Debt Financed Income, Gain From Sale or Other Disposition of Property, Treasury Regulations 1.514(a)-1(a)(v)(b), IRS Publication 598 (2012). UDFI tax at the time of sale works in a similar fashion to the example above, but the IRA is able to use the capital gain tax rate of 20% on profits subject to UDFI as opposed to being subject to the UBIT rate.
IRS Publication 598 (2012). The tax rates applicable to UBIT tax are the trust tax rates which cap out at a maximum rate of 39.6% at $11,950 of annual income subject to UBIT tax. The UBIT tax should be paid from the IRA’s funds and should not be paid with personal funds of the IRA owner.
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Mat is truly an expert on self directed IRAs, and his book is the one book that every self directed IRA investor should read.
"Mat's book is an excellent resource for self directed IRA owners and their advisors. It is the first of its kind in our industry.
Mat has truly written an“Authoritative Guide” for self directed IRAs."
"Mat is an excellent attorney, well versed in the Self-Directed IRA market...His ability to distill the complexities of the Self-Directed IRA
so that the average person can understand them, and ensure that they don't get "tripped up" is second to none.
"Mat’s book is the most practical and comprehensive self directed IRA guide in our industry. Reading this handbook should be the first step for any alternative asset investor, investment sponsor, or trusted advisor that seeks to become informed about how to maximize the value of IRAs."
"Mat's books is a great reference guide for self-directed IRA investing – Best I’ve seen in 30 years of being in the business."
"The Self Directed IRA Handbook by attorney Mat Sorensen is the most comprehensive book ever written about one of the
best investment and retirement savings tools ever created: the Self-Directed IRA."
J.P. Dahdah
Mat’s book is the most practical and comprehensive self directed IRA guide in our industry. Reading this handbook should be the first step for any alternative asset investor, investment sponsor, or trusted advisor that seeks to become informed about how to maximize the value of IRAs.