Tax Return for UBIT – Does your retirement plan own leveraged real estate or an active business?

Just a quick, last-minute reminder…

  • If your IRA owns mortgage-leveraged real estate, you owe UBIT.
  • If your IRA or 401(k) owns an active business structured as a pass through entity (such as an LLC or partnership), you owe UBIT.
  • If your 401(k) owns mortgage-leveraged real estate AND the mortgage is a “seller carry”, you owe UBIT.

UBIT, or Unrelated Business Income Tax, applies to tax exempt organizations including retirement plans. To pay UBIT, Form 990-T must be filed with the IRS. If this is all news to you, once you are done scolding yourself, you may want to file for an extension using Form 8868.

Reader Interactions

Comments

  1. Hi Jeff,

    We formed an LLC which has 2 members: my IRA and my husband’s IRA. The LLC bought a rental condo. I was under the impression that any net income from the condo would not be taxed until we take the IRA distribution at the required time.
    Now it seems we owe UBIT?

    We have another pair of traditional IRAs that were invested in stocks last year (before the crash, fortunately), but we did not have to pay taxes on the capital gains.

    Are these two investments (both IRAs) treated differently in terms of taxes?

  2. I believe the third (leveraged with seller carry) doesn’t always apply. While IRC 514(c)(9)(B)(v) does indeed say that the real property exception doesn’t apply if the seller or related persons provides financing, IRC 514(c)(9)(G)(ii) states “Clause (v) of subparagraph (B) shall not apply if the financing is on commercially reasonable terms.”

  3. Bob,

    Nice find. It’s funny that 514(c)(B)(v) didn’t just say “the exception doesn’t apply to seller financing unless it carries reasonable terms”. That would save a lot of paper and make it much easier to understand.

    Utter inefficiencies like this add up to an Internal Revenue Code of over 60,000 pages that, to my knowledge, no human has read in its entirety. Even if a human were silly enough to read it all, making sense of it all by cross referencing where needed would probably require more time than a person’s lifespan.

    It is only realistic to endeavor to understand a tiny sliver of it, and even then to say it’s a challenge would be an understatement.

    Thanks for the heads up.

  4. Other accountants–including Diane Kennedy, who’s no slouch–say that 401k accounts, in particular the self-directed Solo 401k, are NOT subject to UDFI or UBIT in , say, real estate transactions. I even seem to recall reading it on this site. Could you clarify by providing a source to prove, or, as they say in statistics, fail-to-disprove that UBIT applies to a 401k?

  5. Internal Revenue Code section 514 introduces UBIT and has exclusions for qualified plans. It’s not only for self-directed Solo 401k plans or even 401k plans specifically… it is for all qualified plans and a 401k is a qualified plan.

    Jeff

    p.s. We provide much more comprehensive documentation (white papers, knowledgebase articles, etc.) to our Solo 401k clients. Call us at 877-903-2220

  6. I would like to confirm what I think I’ve learned after reading your blogs about UBIT and UDFI as they relate to IRA’s .
    1) If I want to actively trade futures including forex directly not through an exchange, day trade stocks, flip houses, etc. (an active business) then UBIT applies whether it is done in the IRA itself, an IRA LLC or the IRA invests in a trading company, public or private. There is an exception for trading stocks on margin.
    2) If the IRA, LLC, or business partly owned by either invest in leveraged real estate then UDFI applies with an exception for income
    from public companies that use debt.
    Assuming the above are correct is there another way to structure the activities to avoid the problem?
    Thanks and thank you very much for your site.

  7. I want to purchase a house in my IRA with seller financing and then sell the house using the IRA as the seller offering financing. Does this trigger UBIT?

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