I have a Solo 401 k. I am planning to purchase a vacation rental with funds in my account. I was reading about triggering a UBIT situation. The unit is currently in a rental program with a company (not AirBNB or VRBO) and my plan is to leave it that way. I was going to set it up so that the rental income is deposited directly into my Fidelity account for my solo 401k. I don't plan to have anything at all to do with the property other than owning it and paying the Maintenance/HOA fees from my account.
Before I sign, is this a problem?
Good question and no such investment will not trigger unrelated business income tax because it will be a buy and hold rental property, and a solo 401(k) plan is meant to be invested passively in investments such as rental properties. Unrelated business income tax applies in the context of real estate if the solo 401(k) consistently engages in flipping real estate. Please see the following for more information.
What is Unrelated Business Income Tax?Unrelated Business Income Tax (UBIT) is assessed when a tax-exempt entity, such as an IRA or solo 401k plan engages in a business activity that is not related to its general purpose.
For example, if a self-directed solo 401k invests via an equity investment in a shoe store or a computer store the income generated from the business would be subject to UBIT. Reason being, selling shoes and computer equipment or services is not the general purpose of a solo 401k plan. In order for the retirement plan to not be subject to UBIT, the IRA or solo 401k investment must be passive in nature. This tax was created to keep tax-exempt entities on a level playing field with non-tax-exempt entities such as solo 401k plans and IRAs.