An LLC where the self-directed IRA is the sole member of the LLC is often invested in real estate. If the IRA funded LLC does not have enough funds to outright purchase the real estate property, an option is for the IRA LLC to obtain a non-recourse loan.
Give Rise to UDFI (IRC Sec. 514)
However, since the property will be deemed mortgage if borrowed funds (non-recourse loan) are used to make the IRA LLC property investment, this will give rise to unrelated debt-financed income (UDFI). This tax would need to be paid by the IRA LLC and only applies to real estate that is purchased using borrowed funds. Finally, IRS Form 990T must be filed to report and pay UDFI if the amount of UDFI is more than $1,000. See IRS Publication 598 for more information.
The Amount of UDFI
UDFI is calculated based on the profits (e.g., rental income the sale proceeds) and calculated using the highest amount of leverage carried during the year. The first $1,000 is exempt from UDFI.
List of Non-Recourse Lenders
http://www.titanbank.com/
