When it comes to making investments with a self-directed IRA LLC, the IRS generally does not tell you what you can invest in, only what you cannot invest in. The types of investments that are not permitted to be made using retirement funds is outlined in Internal Revenue Code Section 408 and 4975. These rules are generally known as the “Prohibited Transaction” rules.
A retirement account or charity would be subject to a tax on income generated from an active trade or business via a passthrough entity, margin, or real estate acquisition indebtedness. The tax is called Unrelated Business Taxable Income (also known as UBIT or UBTI) or Unrelated Debt Financed Income tax. In general, only income generated from an active trade or business via a passthrough entity, margin, or real estate acquisition indebtedness would be subject to the UBTI/UBIT tax.
In general, when debt-financed property is held for exempt purposes and other business purposes, the organization must allocate the basis, debt, income, and deductions among the purposes for which the property is held. One would not include in Schedule E amounts allocated to exempt purposes
Acquisition indebtedness does not include the “borrowing” of stock from a broker to sell the stock short. Although a short sale creates an obligation, it does not create debt.
To learn more about using a self-directed IRA LLC to make investments involving margin please contact a tax expert at the IRA Financial Group at 800-472-0646.