Unrelated Business Income Tax (UBIT)
Unrelated Business Income Tax (UBIT) applies to operating income received from a company owned by a self-directed IRA.
In order to understand UBIT, you must first understand the term “unrelated business income” relevant to your retirement account.
Unrelated business income is any continual and consistent income derived from your IRA that is not necessarily related to the retirement account’s purpose. In the eyes of the IRS, businesses owned by tax-advantaged accounts should incur some tax liability—just as businesses not owned by IRAs do.
If your self-directed real estate IRA transactions incur UBIT, IRA funds are used to pay the tax and not paid by you personally. Rents, interest, and dividends received from investments are NOT subject to UBIT, but income from other sources could be subject to UBIT.
Your IRA may owe unrelated business income tax if:
- The IRA makes a profit through a business operation or entity (such as a partnership or an LLC) that did not pay business tax on that profit before distribution to the retirement account. You should check with the tax advisor to that business to see how the income from the partnership or LLC is reported to the IRS to see if this creates a UBIT situation for the IRA.
- If your IRA used a non-recourse loan to purchase real estate, UBIT is owed on the debt-financed portion of any profit the investment gains. Any expenses and depreciation of the property can be calculated to offset the tax liability.
As the calculation process can be somewhat complicated, it is important that you consult with a tax professional to determine UBIT liability related to your self-directed IRA. For more in-depth information, review IRS Publication 598.