Are PRIVATE LENDERS at risk of UBIT (Unrelated Business Income Tax) Liability? [EPISODE #242]

by | Mar 2, 2017

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Are PRIVATE LENDERS at risk of UBIT (Unrelated Business Income Tax) Liability? [EPISODE #242]

by | Mar 2, 2017

Full Transcript

Hey all of you private lenders out there, this episode is for you… and unfortunately, it involves your preferred asset type, and our friends at the IRS.  I’m Bryan Ellis.  I’ll tell you all about it right now in Episode #242 of Self Directed Investor Talk.

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Hello, Self Directed Investor Nation, welcome to the podcast of record for savvy self-directed investors like you!  This is the show where all you’ve got to is give us 7 minutes a day… and you get back MASTERY as a self-directed investor!

Good show for you today, folks, prompted by a telephone consultation I did yesterday for two attorneys who have a major private lending business OUTSIDE of their self-directed IRA… and are also doing MILLIONS in private lending business INSIDE of their IRAs.  These guys have a lot at stake… I did some research, and I’ll tell you what I found.

And as I do so, feel free to write to me with your questions and comments by email at ,   Or – and frankly, I’d really appreciate this – stop by our Facebook page and click the LIKE button.  You can get to it at SDITalk.com/facebook.  And while you’re there, ask any questions you have for me.

And a quick note:  If you’d like to learn how to have a cash credit line of up to $250,000 that’s both unsecured and charges absolutely ZERO interest, stop by SDITalk.com/credit where you can sign up for a free webinar we’re offering this week that will show you exactly how to do that.  We’ve helped clients to raise MILLIONS of dollars in just the past 90 days alone, so if you’re looking for some capital, stop by SDITalk.com/credit right now.

Ok folks, so here’s the deal:  Again, you people are providing the content of my show for me.  I had a consultation with a couple of your fellow listeners yesterday.  For their privacy, I won’t say their names, but all of the details I’ll share with you are accurate.

The basic idea is this:  Both of these guys are lawyers up in Rhode Island, so they know more than enough to understand the need to be careful.  But their legal expertise is in real estate and title work, and not in retirement plan law.

Their concern is this:  Both of them have very large IRA’s, from which they do a lot of private lending.  They also have a very substantial private lending business OUTSIDE of their IRAs.

For those of you who may not be familiar, private lending is just lending your own money to some third party in such a way that you receive PLENTY of collateral and a relatively high interest rate.  Private loans can definitely be a great type of asset.

So your fellow listeners up in Rhode Island are concerned about this situation because it would be an absolute DISASTER if the IRS took a look at their IRA’s and decided that what they are doing is conducting an active business within their IRA’s. That would be a disaster because then their IRA’s would be liable to pay something called “unrelated business income tax” – or UBIT for short – on its earnings each year, as the IRS isn’t keen on people operating active businesses in their retirement accounts.

So is the concern of our lawyer friends justified about this?

There’s good reason, actually.  The comparable issue that many of you folks in SDI Nation may be familiar with is the one where you do a lot of real estate flipping BOTH OUTSIDE and INSIDE of your self directed IRA.  In that case, there’s plenty of precedent that the IRS could, in fact, conclude that your active business is real estate flipping, and that the activity in your IRA is just an extension of your business and is thus subject to UBIT.

Obviously, that’s a very bad thing.

So if the IRS can take that position with house flipping, do our lawyer friends in Rhode Island… and do YOU, my dear listeners… face the same risk if you do private lending both IN and OUT of your self directed IRA?

I’ve certainly got the answer for you, but before I give it to you:  People, I’m not a lawyer.  I’m not giving you legal advice.  If you need legal advice – and you do if you’re using a self directed IRA – then you should talk to a lawyer, period.

And as it turns out, the very best one in the country for this type of thing is THE GREAT ONE, Mr. Tim Berry, America’s best self-directed IRA & 401k attorney – and YES, his contact info is linked on today’s show notes page at SDITalk.com/242.

And Tim is who I asked to help me clarify this issue.

You see, I suspected that our private lending pals might have a better time of it than if they were flipping houses because, frankly, it’s pretty hard to argue that collecting INTEREST on a LOAN is anything but passive.

And this is yet another case of being glad I asked for Tim’s advice, because he both confirmed and obliterated my assumption using case law.

Bottom line, in general:  Yes, the lending activity inside of the IRA is an active business activity, and any fees earned from those activities – such as maybe document preparation – would likely be subject to UBIT.  But the LION’S SHARE of income comes from earning interest from a loan.  And THAT type of income – interest, specifically – is statutorily exempt from UBIT.

And yes, for you legal beagles, both the revenue ruling where this happened and the original code citations are available for you on today’s show notes page at SDITalk.com/242.

Folks, who else in the entire US of A is providing self-directed investors like you with ABSOLUTE GOLD like this?  NOBODY… that’s who!  Nevertheless, I’m SO GRATEFUL that you’re listening to ME right here on Self Directed Investor Talk.

SDI Nation, you long-time listeners know that I’m very, very leary of the use of debt in any way.  But one REALLY brilliant use of debt in your IRA specifically hit me between the eyes this week, and I’d like to share it with you…

…And that’s exactly what I’ll do in TOMORROW’s edition – Episode #243 –  of Self Directed Investor Talk, so be sure to SUBSCRIBE to this show by visiting SDITalk.com or if you’re on an Apple device, subscribe on iTunes.  Either way it’s free for your benefit!

That’s all for today but a quick request… if you enjoyed this show, would you stop by iTunes right now and give us a nice 5-star rating, maybe even write a comment? That would REALLY help us out a lot.  Thanks!

My friends, invest wisely today, and live well forever!

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Bryan Ellis is host of Self Directed Investor Talk, America's #1 radio show and podcast for affluent self-directed investors.  He's also an expert in self-directed IRA's, solo 401k's and turnkey rental property investing... at least, that's what his wife tells him 🙂  He's a contributor to well-respected publications like TheStreet.com, Entrepreneur and ThinkRealty.  Bryan lives in metro Atlanta, Georgia with Carole Ellis - his wife, business partner and best friend - and his 4 children ranging in age from 2 to 19.