The receipt of rental income is considered to be passive income and therefore not subject to UBTI. However, some self directed IRA owners fall into the trap of thinking that this means that they can buy and sell properties on a routine basis (i.e. flipping), and that this would not be active income or running a business.
Even though there are not any bright lines as to when buying and selling real estate through your self directed IRA would constitute UBTI, the general guidelines will be based facts and circumstances. Some of the factors that would be used to determine if the real estate transactions would meet the requirement for UBTI are:
- The purpose for which the property was acquired
- The frequency, continuity and size of sales
- The extent of improvements
- The activities of the owner in improving and disposing of the property
- The purposes for which the property was held
- The proximity of purchase and sale (i.e. how close together were the transactions)
In general we advise clients that flipping or turning one property may or may not meet the UBTI standard. However, if you show a routine pattern of buying and selling property and if there appears to be the intent of turning properties for profit, then you will most likely be subject to UBTI.
For more information on self directed IRAs go to: