The non-recourse quote came back and the UDFI math is ugly

The depreciation question is real and it does shrink UDFI a lot in the early years, because you compute the debt-financed percentage against net income after allocable expenses including depreciation, not against gross rent. On a $240k purchase you're depreciating maybe $180k of building over 27.5 years, call it $6,500 a year, and 65% of that lands against the debt-financed share. On $1,850 rent with taxes, insurance, management, and interest on $156k, your net taxable number before depreciation is thin already. It's plausible your first several years of UDFI sit under the $1,000 filing floor. Have a CPA who has actually done a 990-T run it, because getting the allocation percentage wrong is how people end up filing late.

But you should be honest that this changes over time. Depreciation is fixed and rent isn't, and the loan amortizes so the debt-financed percentage drops while interest deduction drops too. Year 8 looks worse than year 2. If you're planning a long hold in a Roth, model year 10 and 15, not year 1.

Flint is right about reserves and I'd go further. Whichever way you go, decide the reserve number first and then shop under it. I keep about 12 months of full expenses in cash inside the account and it has been boring and correct every time something broke.

Also check whether your custodian charges per-asset or per-transaction fees. Those come out of IRA cash too and people leave them out of the model.

The mechanism thicket describes is how debt-financed income is computed, and the allocation is done on net income attributable to the borrowed portion, so depreciation and interest both reduce it. Two things determine whether your answer is small or not.

First, the average acquisition indebtedness figure moves. The debt-financed percentage is based on average debt over the year relative to average adjusted basis, and adjusted basis falls as you depreciate while debt falls as you amortize. Those move at different speeds, and the direction over a long hold depends on which falls faster. Model it, don't assume it drifts down.

Second, a sale while debt has been on the property in the preceding twelve months brings the debt-financed rules into the gain as well, which is the part people miss when they treat capital gains as exempt. Rents, gains, and interest are exempt from UBIT under the code as a general matter, and debt financing is the exception that pulls part of that back in. Confirm the current thresholds and trust rate brackets with your tax professional for the year you actually file, since those figures change.

On your actual decision, everything turns on your holding period. If you genuinely intend to hold 20 years inside a Roth, a modest annual 990-T liability is a small drag on tax-free compounding and the larger asset may be worth it. If there is any chance you sell in year five, the leveraged path costs you tax on income and potentially on gain, and the clean cash purchase preserves what the Roth was for. Also note that a Solo 401(k) is generally not subject to the debt-financed tax, which matters if you have self-employment income and could hold this somewhere else.