What is UBIT?
When a tax-exempt entity (your self-directed IRA) invests in an asset that is not directly related to its tax-exempt purpose (i.e., running businesses that generate income), any resulting revenue would be subject to the unrelated business income tax (UBIT).
There are a lot of common misconceptions and vagueness surrounding UBIT and UDFI. Some investors often hesitate to invest in assets where these events could occur. UBIT in an IRA is not a penalty, simply a cost of doing business.
What Do UBIT and UDFI Mean?
UBIT: Also known as UBTI (Unrelated Business Taxable Income), are the taxes that the IRS can charge to investments owned by accounts that are considered tax-exempt. The most common causes for UBIT are retirement accounts invested in businesses that generate income classified as “business income” associated with LLCs or partnerships. Another primary income that can trigger UBIT is real estate purchased within the tax-exempt IRA that is debt-financed.
UDFI: This means Unrelated Debt-Financed Income (UDFI), assets that can generate income from a debt-financed aspect like real estate or similar assets held within the IRA. UDFI can be subject to UBIT.
How Do I Know if I Owe UBIT?
Your self-directed IRA may owe UBIT if it has taken part in any of the following examples:
- Your SDIRA has completed business dealings with income-generating assets through an LLC or a Limited Partnership.
- For over half of the applicable tax year, your self-directed IRA has participated in purchasing and selling real estate on a significant level.
- Conducting many private loan deals over the duration of a tax year as a business.
For more information on UBIT, calculating UBIT, or filing, contact one of our knowledgeable experts today!
How Do I Calculate How Much UBIT I Owe?
How Do I File for UBIT?
If your self-directed IRA owes UBIT, your IRA must now obtain a Federal Tax Identification Number (EIN) and file IRS Form 990-T, along with any other applicable paperwork required by the IRS.
Form 990-T file date by April 15th of each year (the date taxes are due is subject to change, and you can request an extension.)
Curious about more rules regarding self-directed investing?Learn more
Frequently Asked Questions
Just as with regular taxes, April 15th is the set IRS-mandated Tax Day (unless otherwise stated by the IRS).
UBIT is not illegal or considered a prohibited transaction by the IRS within retirement accounts.
IRA funds aren’t entirely tax-exempt when an “unrelated” aspect of UBIT or UDFI comes into play. When you invest in Limited Partnerships or LLCs that generate income unrelated to the IRA, UBIT and UDFI are triggered and considered taxable in your IRA.