Learn more about self-directed investing:
In this brief training, Retail Sales Manager, John Bowens, breaks down what UBIT is and how it can apply or not apply to your IRA, 401(k) or other tax-advantaged investment account.
You'll learn what activities can possibly produce UBIT and what activities generally do not produce UBIT.
Some investors see the NET ROI payoff even after paying UBIT, which can still make some of these transactions viable for an investor, so don't necessarily think you should never transact with a UBIT generating investment.
UBIT stands for Unrelated Business Income Tax, which generally means a tax levied on unrelated business income generated by a tax-exempt entity such as an IRA or other tax-advantaged investment account.
In other words, if your IRA or other tax-advantaged account invests in certain ways or in certain types of transactions, then your IRA can get taxed?
Activities that generally have no UBIT implications, so the IRA is afforded full tax-exempt status:
1. The IRA buys a rental property free and clear with cash from the IRA. So no debt against the property, or in other words the IRA didn't borrow money for the transaction.
This is very important. The IRA collects monthly rental checks, which is all tax-exempt profit back to the IRA.
The IRA sells the property at a later date and generates long term capital gain, and this income is also tax-exempt.
2. The IRA makes a loan to a 3rd party. So, for real estate - making a loan secured by real estate. In other words, your IRA is holding a promissory note and mortgage. Now your IRA is collecting interest income, and interest income to your IRA, assuming you follow all other rules, is subject to tax. So your IRA can enjoy the tax-free gains of this type of investment.
3. The IRA or other tax-advantaged account invests in a business that is structured or elects to be taxed as a C-Corporation. Think investing in publicly traded stocks. The corporation pays corporate taxes and then all income passes through as qualifying dividend income which is tax-exempt.
In contrast to this, if the entity is structured and taxed as an LLC, the income flows through to the IRA. This "pass through" income can be subject to this tax.
What are activities that can generate UBIT:
1. The IRA invests in a business or other partnership arrangement that is considered an ongoing trade or business and the income is passed through the LLC or partnership and is not taxed at the corporate level.
Tax rate | Thresholds
10% | $0 - $2,550
24% | $2,551 - $9,150
35% | $9,151 - $12,500
37% | Over $12,500
2. The IRA purchases a property with a loan. This is also known as Unrelated Debt Financed Income Tax.
Example outlined in video.
3. Your IRA invests in an LLC or other partnership arrangement that holds real estate and the real estate is leveraged.
Example outlined in video.
How do you report the income if you are involved in a UBIT generating activity?
You will be required to file a 990-T tax return. This is a tax return for your IRA nad is totally separate from your personal or other business returns.
Some states require a filing and some don't, so you will need to check with your tax professional on these matters. The tax levied on the income is subject to the estate and trust tax schedule. Your IRA of course is responsible for paying the tax, the IRA would essentially write the check for these taxes due.
Equity Trust Company is a passive custodian and does not provide tax, legal or investment advice. Any information communicated by Equity Trust Company is for educational purposes only, and should not be construed as tax, legal or investment advice. Whenever making an investment decision, please consult with your tax attorney or financial professional.
2 окт 2024
