Posted by John Merchant on July 21, 2003 at 21:34:15:
Michael
I’m working on that issue right now, and as you point out, the real issue appeare to be how long, how many, etc.
I’ve asked a couple of the national custodians to give me their take on this, as they advertise for RE investors’ IRAs, and give examples of their clients who’ve done short term holds, with sales for substantial profits, without UBIT problems.
It may be a day or so but I will provide the board with the info I glean; and if unable to get substantive info that way, I guess I’ll have to go to the law library and do some serious reading so as to be able to give a fairly dependable answer.
If anybody else has already done this legal research, we’d welcome hearing from you as to what exactly you’ve found in the law…no guesses please, but some hard legal citations as per IRC, or court decisions thereon, or IR Regs.
While I’m sure not any kind of tax expert (which John Hyre surely is), it is my understanding that the issue of when/if one becomes a dealer is the number of deals one does in a year…one or two, probably not held to be a dealer; more than that, some risk.
Question for John Merchant - Posted by Micheal Wong
Posted by Micheal Wong on July 21, 2003 at 21:11:43:
I’m following up on a prior post as it got lost in the shuffle and I would really like to hear your comments on this. You stated:
“No UBIT unless there’s some income, other than your capital gain of sale price minus your acquisition & fixup costs…which has zero tax if it’s done in your SDIRA, through Equity Trust, etc.”
My understanding is that once you start doing flips in your IRA, your IRA is considered a dealer and thus all your flips are subject to UBIT. I know there’s some gray area about the number of deals, how long you hold them, etc. etc. before you “probably” would be considered a dealer, but you seem to be saying in no uncertain terms that flipping properties in your IRA is never subject to UBIT. Is that the case, or am I misunderstanding your post? Or are you implying that you can get away with not being a dealer by doing less than X number deals per year, etc. etc. Anyway I would love to do flips in my IRA and avoid UBIT … so I’m just trying to get all the info I can. Can you elaborate on your prior statement? Any anyone else have any input on this?
Posted by Micheal Wong on July 21, 2003 at 22:48:33:
Publication 598 is very clear. It says on page 9…
"Gains and losses from disposition of property. Also excluded from unrelated business taxable income are gains or losses from the sale, exchange, or other disposition of property OTHER THAN:
1)…
Property held primarily for sale to customers in the ordinary course of a trade or business, or
…"
If you do 10 flips a year in your IRA the IRS can easily say that you are in the flipping business, and technically you are a dealer in real property. Thus all your flips are subject to UBIT, because you bought property with the intent to sell it for a profit (as opposed to holding on to it as a long term investment).
The question is, how many flips do you have to do in a year, how long or short do you have to hold them, etc. etc. before you are classified as a dealer by the IRS. It seems to be one of those things where there is no cut and dry answer and you won’t know until you get audited. If that’s the case, I can’t see myself doing a lot of flips in my IRA I don’t think … there is just too much uncertainty. If I end up paying UBIT (we’re talking personal tax rates i.e. 40-50%) on all the flips I would lose a ton of money vs. if I just did those flips in some of my c-corps, etc. So I just don’t know.
I’m still searching for case law to see how they have ruled in the past based on specific situations i.e. someone did 3 flips in a year and was not classified as a dealer, while someone who did 6 flips in a year WAS classified a dealer, etc. etc.
I would love to hear from the tax pros on this one. When all is said and done, is it just a matter of how far an individual wants to “push your luck” and just hope you never get audited and never have to deal with it?