Tax Considerations for Direct Investments

To minimize fees levied by third-party asset managers, certain investors, including tax-exempt organizations and sovereign wealth funds (SWFs), have significantly increased their investment allocation to direct investments. Both types of investors have specific tax structuring considerations that may often affect the rate of return on their investments. Thus, it is important to consider the tax entity classification of both the investor and the investment entity.

Considerations for U.S. Tax-Exempt Organizations

Internal Revenue Code Sec. 511 may tax otherwise tax-exempt organizations on their unrelated business taxable income. UBTI is income from a trade or business regularly carried on by a tax-exempt organization that is not substantially related to the organization’s exempt purpose. Additionally, although loan origination may be treated as a business, capital gains, interest and dividends are excluded from UBTI unless the underlying property is debtfinanced property.

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This article is partially reprinted here with permission from Middle Market Growth.