There’s a lot of misconception when it comes to UBIT, and that’s because it can sound daunting and scary when taxes are involved. Understandably. But there’s no reason to fret, it’s really not as scary as it sounds.
One reason that it might be confusing is that when we think of self-directed IRAs, we think of them being tax-deferred or tax-free. When you make an investment, and that investment makes money, it goes back into your IRA without having to pay taxes on it. So when we’re told that some unexpected tax event has occurred, it can feel like you’ve done something wrong but don’t worry, we got you covered.
Q: Do I have to file for Unrelated Business Income Tax?
A: Probably. Anybody who has made investments that are considered unrelated business activity—like an LLC—and contains debt financing within the tax-advantaged qualifies for UBIT.
Q: Is UBIT considered a prohibited transaction by the IRS?
A: In short, no. It is not illegal nor is it considered a prohibited transaction within retirement accounts. But keep in mind that some transactions that make a UBIT event occur may also have prohibited transaction issues.
Q: When do I have to pay it?
A: Just as with all taxes, April 15th of the following year. So any taxes your IRA qualified for in 2017 is paid next April 15th 2018, paid via IRS Form 990-T.
Q: Does it still apply if I have a Roth IRA?
A: It does, yes. Regardless of the fact that Roth IRAs grows tax-free, and aren’t taxed at retirement, UBIT rules still apply to some investments that are held within the Roth account.
Q: Is it possible to keep any retirement account from paying UBIT?
A: Yes actually, a solo 401K account is not subject to this tax when invested in real estate, but is subject to UBIT when invested in an LLC.