UDFI in the context of investing in partnerships can take two forms.
The second source of UDFI is debt incurred by the partnership to acquire property.
The exempt organization could have UDFI from both internal and external sources if, for example, it borrows to purchase its partnership interest and the partnership financed its purchases of property.
The UDFI relating to income on debt-financed partnership property is calculated and reported by the partnership as noted above.
Additionally, proper planning and structuring can help mitigate or eliminate the effects of UBTI and UDFI.
However, income from debt-financed property (whether held directly or indirectly by the SDIRA or SDIRA/LLC) is partially taxable under the UDFI rules because the income generated from the investment is not earned solely by investment of the SDIRA/LLC's capital, but rather by bank (or private) financing.
Here, the yearly rental income that is allocated to Mark's SDIRA/LLC is partially subject to tax under the UDFI rules.
On a sale of the building in an asset sale, one-third of the $750,000 gain (the ratio of the debt to FMV ($300,000/$900,000)) will be UDFI
. The $250,000 UDFI
Hill be subject to the 100% excise tax.