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UBIT: The Unrelated Business Income Tax

Section 511 of the Internal Revenue Code states that IRA accounts can be subject to an unrelated business income tax (UBIT). This tax may occur if the account includes an asset or interest from which an unrelated business taxable income (UBTI) is generated.

As a general rule, investments from IRA accounts that can trigger UBIT can be limited partnerships, limited liability companies (LLC), or other investments that involve debt financing and/or operate in an unrelated business.
Usually, most investments that generate passive income, such as dividends, royalties or rental payments, are exempt from UBIT. However, if the asset or property that generates the income is purchased with debt financing, the asset will be subject to UBIT in proportion to the income or profit that is debt-financed. For example, a rental home in an IRA purchased with non-recourse financing is responsible for UBIT.

Is my IRA subject to an UBIT?
UBIT can occur if ALL of these  statements are correct:

  • Income is generated from “trade or business” activity (i.e. selling goods and services).
  • The activity described above is not significantly related to exempt status.
  • The business in question is regularly operated by organization.

Payment of UBIT

Generally, IRAs that earn over the current UBTI exclusion of $1,000 will need to file Form 990T with the IRS by the tax filing deadline (April 15th). Payments for Form 990T have to be made from assets in the IRA itself. Your custodian will need to be instructed to pay these tax amounts before the deadline (plus any extensions).

IRA accounts that receive less than the UBTI exclusion level are not obliged to file Form 990T. In most cases, UBTI is reported on Schedule K-1. The investment sponsor or accountant can prepare this schedule.

Sense Financial Services LLC does not provide tax, legal, or investment advice. Any information communicated by Sense Financial Services LLC is for educational purposes only, and it should not be construed as tax, legal, or investment advice. Whenever you make an investment decision, please consult with a legal, tax, and/or accounting professional.

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