What is UDFI?
The Unrelated Debt Financed Income tax is imposed on the unrelated debt financed income of most exempt organizations. The purpose of the tax is to prevent unfair competition by exempt organizations that could use their tax exempt status to gain an advantage over taxable businesses. Gross income subject to the tax consists of income from an activity that creates income through the use of debt or leverage. The deductions directly connected with the debt financed income as well as specified modifications are taken into account in determining unrelated debt financed income. The tax is imposed at the corporate or trust income tax rates, depending upon the legal form of the exempt organization. There is an annual deduction that offsets the first $1,000 of UDFI/UBTI. UDFI stands for Unrelated Debt Financed Income. UDFI is income generated by an IRA, or other retirement plans, through debt-financing or leverage. UDFI is taxed much like UBTI and is similarly as complicated.
UDFI stands for Unrelated Debt Financed Income. UDFI is income generated by an IRA, or other retirement plans, through debt-financing or leverage. UDFI is taxed much like UBTI and is similarly as complicated. UDFI only applies to the profit realized through debt and is based on the highest amount of leverage carried within the past 12 months. Refer to IRC § 514(a) (1). For example: Your self-directed IRA purchased a piece of raw land in 1999 for $100,000 using a non-recourse loan with 50% down. In 2004, you sold that same piece of property to a developer for $200,000. Your IRA had secured a 50% loan to value (LTV) on the property, and let’s assume that you never paid down any principle because it was an interest only note. Fifty percent of the profit would be subject to UBIT because it was generated by money that was not related to the self-directed IRA. As a side note – UDFI does not apply if the debt is paid off 12 months prior to the sale of the property. If the self-directed IRA ca
UDFI stands for Unrelated Debt Financed Income, which means it is income generated by an IRA, or other retirement plans, through debt-financing or leverage. UDFI is taxed much like UBTI and is sometimes as complicated. UDFI only applies to the profit realized through debt and is based on the highest amount of leverage carried within the past 12 months. Refer to IRC § 514(a) (1).
