Investing in Real Estate or Private Equity? You May Be Affected By UBIT

By Elsie Dudukovich0 Comments

When you invest in alternative assets you may find yourself addressing expenses that are different from your experiences with traditional assets. While you might be familiar with property taxes, paying Unrelated Business Taxable Income (UBIT) could be a first-time event.     
If you are looking for a simple starting place for understanding what triggers UBIT, consider this: UBIT is possible when an IRA investment benefits from something it does not own. 
The generation of UBIT becomes a consideration when an investment in your IRA:
  • takes on debt to finance an investment, such as a non-recourse loan to help fund a property purchase;
  • owns a business that is a flow-through entity, such as a Limited Partnership, a LLC, or a Land Trust; or
  • invests in subject-tos and/or lease options.
With flow-through entities, IRS rules allow an IRA to have a percentage of ownership in most business structures, provided all the necessary guidelines are followed. Remember to consider UBIT as a possible expense when researching investment opportunities and structuring options for your assets.  As with all things related to tax, financial, or legal concerns, it may be in your best interest to have a discussion with a qualified, disinterested third party to determine if UBIT will be a specific concern for you. IRS publication 598 provides UBIT rules and may help make it easier to have this discussion with your tax advisor. 

If you find you are responsible for paying UBIT, you can either have an IRS Form 990-T prepared by Equity Trust or engage a third party to take care of this task.  Equity Trust can only sign returns we prepare. If the return is prepared by a third party, this preparer is responsible for signing. As with all self-directed IRA investment expenses, the tax payment is required to come from your IRA. Simply complete a One-Time Bill Pay Direction of Investment through the myEQUITY client portal and include a copy of the prepared 990-T form. Even though your investment may be properly structured, failure to pay any required taxes can put you on the wrong side of the IRS. Situations such as investing in a subject-to and/or lease option can be seen as a possible grey area when it comes to UBIT.
If you are interested in having an IRS Form 990-T prepared by Equity Trust, you can call 888-382-4727 for more details about this service.