---
title: What is unrelated debt-financed income (UDFI)?
description: Unrelated Debt-Financed Income (UDFI) occurs when a retirement account, such as your IRA owns a real esate property that is debit-financed (with a non-recource promissory note), and the property generates income.
---
[Skip to content](https://knowledge.stratatrust.com/what-is-unrelated-debt-finance-income-udfi#main-content)
[](https://www.stratatrust.com/)
Open main navigation
Close main navigation
- [Log In](https://www.stratatrust.com/log-in/)
[Log In](https://www.stratatrust.com/log-in/)
How can we help you today?
- There are no suggestions because the search field is empty.
1. [Self-Directed Knowledge Center](https://knowledge.stratatrust.com/?hsLang=en)
2. [IRS Reporting](https://knowledge.stratatrust.com/irs-reporting?hsLang=en)
3. [Investment Income & Taxes](https://knowledge.stratatrust.com/irs-reporting?hsLang=en#investment-income-taxes)
# What is unrelated debt-financed income (UDFI)?
**Unrelated debt-financed income (UDFI)** occurs when a retirement account, such as your IRA, owns a real estate property that is debt-financed (with a non-recourse promissory note), and the property generates income. Since this is considered unrelated to the tax-exempt status of the IRA (including Roth IRAs) under federal tax law, the income is subject to its own tax.
Limited partnerships, limited liability companies, real estate, and other entities that carry on an unrelated business or borrow funds to finance the acquisition of property may generate taxable income. Investments that are structured as notes, REITs, and other private corporations that are not LLCs or LPs will **not** trigger UDFI.
**UDFI calculation**
The average indebtedness is calculated for the year, and only that portion of the income is taxed as UDFI.
For example, if your average property indebtedness is 50% and your investment income is $6,000, then the portion of the income that is considered UDFI is $3,000. As the indebtedness goes down, so does the UDFI.
| Annual Average Property Indebtedness | Investment Income | Taxable Income (UDFI) |
| --- | --- | --- |
| Year 1 - 50% | $6,000 | $3,000 |
| Year 2 - 25% | $6,000 | $1,500 |
| Year 3 - 10% | $6,000 | $600 |
**Accountholder responsibilities**
The account owner is responsible for calculating UDFI and determining if the filing of IRS Form 990-T is necessary. As a custodian for self-directed IRAs, STRATA does not file IRS Form 990-T, nor do we advise on or calculate UDFI. STRATA does not provide investment, legal, or tax advice. Individuals should consult with their investment, legal, or tax professionals for such services.
Find out more with STRATA's **Quick Guide to UBTI & UDFI**:
[](https://stratatrust.hflip.co/de53ea8c2d.html)
- [Manage Your STRATA Account](https://knowledge.stratatrust.com/manage-your-strata-account?hsLang=en#main-content)
- [Online Account Access](https://knowledge.stratatrust.com/manage-your-strata-account?hsLang=en#online-account-access)
- [Account Maintenance & Forms](https://knowledge.stratatrust.com/manage-your-strata-account?hsLang=en#account-maintenance-forms)
- [Fees](https://knowledge.stratatrust.com/manage-your-strata-account?hsLang=en#fees)
- [Account Security & Protection](https://knowledge.stratatrust.com/manage-your-strata-account?hsLang=en#account-security-protection)
- [General Tips](https://knowledge.stratatrust.com/manage-your-strata-account?hsLang=en#general-tips)
- [Learn About Tax-Advantaged Accounts](https://knowledge.stratatrust.com/learn-about-tax-advantaged-accounts?hsLang=en#main-content)
- [Self-Directed IRAs](https://knowledge.stratatrust.com/learn-about-tax-advantaged-accounts?hsLang=en#self-directed-iras)
- [Benefciary/Inherited IRA](https://knowledge.stratatrust.com/learn-about-tax-advantaged-accounts?hsLang=en#benefciary-inherited-ira)
- [Trump Account](https://knowledge.stratatrust.com/learn-about-tax-advantaged-accounts?hsLang=en#trump-account)
- [Investment Options](https://knowledge.stratatrust.com/investment-options?hsLang=en#main-content)
- [Real Estate (Directly Owned)](https://knowledge.stratatrust.com/investment-options?hsLang=en#real-estate-directly-owned)
- [Private Equity](https://knowledge.stratatrust.com/investment-options?hsLang=en#private-equity)
- [Private Debt](https://knowledge.stratatrust.com/investment-options?hsLang=en#private-debt)
- [Gold & Precious Metals](https://knowledge.stratatrust.com/investment-options?hsLang=en#gold-precious-metals)
- [Other Private Assets](https://knowledge.stratatrust.com/investment-options?hsLang=en#other-private-assets)
- [Public Investments](https://knowledge.stratatrust.com/investment-options?hsLang=en#public-investments)
- [Funding & Transfers](https://knowledge.stratatrust.com/funding-transfers?hsLang=en#main-content)
- [Direct Transfer](https://knowledge.stratatrust.com/funding-transfers?hsLang=en#direct-transfer)
- [Rollover](https://knowledge.stratatrust.com/funding-transfers?hsLang=en#rollover)
- [Annual Contribution](https://knowledge.stratatrust.com/funding-transfers?hsLang=en#annual-contribution)
- [Conversion & Recharacterization](https://knowledge.stratatrust.com/funding-transfers?hsLang=en#conversion-recharacterization)
- [Distributions & Withdrawals](https://knowledge.stratatrust.com/distributions-withdrawals?hsLang=en#main-content)
- [Cash Distribution](https://knowledge.stratatrust.com/distributions-withdrawals?hsLang=en#cash-distribution)
- [Distribution (In-Kind)](https://knowledge.stratatrust.com/distributions-withdrawals?hsLang=en#distribution-in-kind)
- [Precious Metals Distribution - Liquidation Required](https://knowledge.stratatrust.com/distributions-withdrawals?hsLang=en#precious-metals-distribution-liquidation-required)
- [Delaware Depository](https://knowledge.stratatrust.com/distributions-withdrawals?hsLang=en#delaware-depository)
- [Texas Precious Metals Depository](https://knowledge.stratatrust.com/distributions-withdrawals?hsLang=en#texas-precious-metals-depository)
- [Tax Considerations](https://knowledge.stratatrust.com/distributions-withdrawals?hsLang=en#tax-considerations)
- [Transfers Out](https://knowledge.stratatrust.com/distributions-withdrawals?hsLang=en#transfers-out)
- [Required Minimum Distributions (RMDs)](https://knowledge.stratatrust.com/required-minimum-distributions-rmds?hsLang=en#main-content)
- [Understanding RMDs](https://knowledge.stratatrust.com/required-minimum-distributions-rmds?hsLang=en#understanding-rmds)
- [Calculating Your RMD](https://knowledge.stratatrust.com/required-minimum-distributions-rmds?hsLang=en#calculating-your-rmd)
- [Taking Your RMD](https://knowledge.stratatrust.com/required-minimum-distributions-rmds?hsLang=en#taking-your-rmd)
- [IRS Reporting](https://knowledge.stratatrust.com/irs-reporting?hsLang=en#main-content)
- [Fair Market Value](https://knowledge.stratatrust.com/irs-reporting?hsLang=en#fair-market-value)
- [Investment Income & Taxes](https://knowledge.stratatrust.com/irs-reporting?hsLang=en#investment-income-taxes)
- [IRS Form 5498](https://knowledge.stratatrust.com/irs-reporting?hsLang=en#irs-form-5498)
- [IRS Form 1099-R](https://knowledge.stratatrust.com/irs-reporting?hsLang=en#irs-form-1099-r)
- [Get Started](https://www.stratatrust.com/get-started/)
- [Contact Us](https://www.stratatrust.com/contact-us/)
- [Self-Directed IRAs](https://www.stratatrust.com/sdiras/)
- [Insights Blog](https://www.stratatrust.com/resource-center/insights-blog/)
- [Resource Center](https://www.stratatrust.com/resource-center/)
- [Why STRATA](https://www.stratatrust.com/why-strata/)
[-3.png?width=201&height=68&name=STRATA_white%20(no%20background)-3.png "STRATA_white (no background)-3")](https://www.stratatrust.com/)
STRATA Trust Company (“STRATA”) performs the duties of a directed (passive) custodian, and as such does not provide due diligence to third parties regarding prospective investments, platforms, sponsors, dealers or service providers. As a custodian, STRATA does not sponsor, endorse or sell any investment and is not affiliated with any investment sponsor, issuer or dealer. STRATA does not provide investment, legal or tax advice. Individuals should consult with their investment, legal or tax professionals for such services.