What is UBIT, UDFI and UBTI?
There are a lot of common misconceptions and vagueness surrounding UBIT, UDFI and UBTI. So much so that some investors often hesitate to invest in assets where these events could occur. For some assets that retirement investors choose, UBIT and so forth should not be seen as a penalty, but often times more so a cost of doing business.
What do all These Acronyms Mean?
UBIT This is the taxes that the Internal Revenue Service can charge to investments that are owned by accounts that are considered tax-exempt. The most common causes for UBIT are retirement accounts that are invested in businesses that generate income that can be classified as “business income” associated with LLCs or partnerships. Another main income that can trigger UBIT is real estate that’s purchased within the tax-exempt IRA that is debt-financed.
UBTI is Unrelated Business Taxable Income. It is the type of income that is taxable.
These two terms are often used interchangeably, which can cause a lot of confusion.
UDFI means Unrelated Debt-Financed Income, and it is mainly used within assets that can generate income from a debt-financed aspect like real estate, or similar assets that can be held within the IRA. UDFI can be subject to UBIT.