Paid 9,400 in UBIT and filings inside the Roth I bought for tax-free compounding

I put 120k of Roth IRA money into a value-add residential fund in early 2023. The pitch was 14 to 16 percent, the sponsor had a track record I checked properly, and the whole point of using Roth money was that the gains would come out tax free later.

The fund runs at about 62 percent leverage. I knew that. I had read that debt-financed income inside an IRA creates unrelated business taxable income and that trust rates get high fast. What I did not do was model it. I told myself the fund income would be mostly depreciation-sheltered in the early years and that the taxable portion would be small.

Years one and two it was small, around 400 and 700, and I filed nothing on the first year because I misread the threshold and thought it applied per investment. Year three the fund sold two assets. My share of the gain was debt-financed and the K-1 came in with a UBTI figure that produced roughly 7,100 of tax at trust rates, on top of about 1,400 to a CPA who had to prepare two years of returns for the IRA and clean up the year I skipped, plus a penalty and interest amount I will round to 900.

So call it 9,400 out of the account, in an account whose entire reason for existing was that it would not pay tax.

The fund itself did fine. Distributions and the realized gains have the position up meaningfully. That is not the point. I spent Roth capacity, which is the scarcest capital I have, on the one investment shape that gives back part of the tax advantage, and I paid the filing costs from inside the wrapper so those dollars will never compound again.

What I would do differently: put levered equity in the taxable account where the depreciation actually helps me, and reserve Roth money for interest and unleveraged rental income where the exemption holds. And I would have asked the sponsor for an estimated UBTI figure per 100k before signing, in writing, including sale years. Anyone competent can produce it. I just never asked. My own filing errors are mine, and if you are running this you need a CPA who has done 990-Ts, not one who has heard of them.