Self Directed IRA Rules/UBIT/UDFI

UBIT (Unrelated Business Income Tax) What is UBIT?

When does it occur? And how can I remain compliant?

If your IRA owns an asset or interest that produces unrelated business taxable income (UBIT), your IRA may be subject to an unrelated business income tax (UBIT) pursuant to Section 511 of the Internal Revenue Code.

Is My IRA Responsible for UBIT?

UBIT applies if ALL of the following are true:

  • Income is derived from "trade or business" activity (i.e., sale of goods and services).
  • Business activity is not substantially related to exempt status.
  • Business is regularly carried on by organization.

Generally, IRA investments that can generate UBIT include:Limited Partnerships (LPs),Limited Liability Companies (LLCs), and Any investment that incurs debt financing and/or is involved in an unrelated business.

What is UBIT? How does it affect my IRA investments?

In this short 5 minute video, you will learn:

  • When UBIT occurs
  • How unrelated debt financed income (UDFI) is calculated
  • When operational businesses such as LLCs or LPs incur UBIT
  • How the filing process works

How is UBIT calculated? How can I remain compliant with my IRA investments?

In this brief 10 minute video, UBIT will be covered in greater detail and you will learn:

  • Your options if your suffer a net operating loss (NOL) or have less than $1,000 in unrelated business taxable income
  • The ability to write off expenses and depreciation for rental properties that incur UBIT within an IRA
  • The trust tax rates that your IRA is taxed when it incurs UBIT
  • Proforma analysis of UBIT for a debt-financed real estate property
  • The 990-T filing process
  • Why operational businesses incur UBIT and how the process works

The attached whitepaper PDF from Equity Trust Advisor Company dives into even more detail and specific information regarding UBIT. These reports are great resources to share with your CPA, tax professional, or other members of your financial team.

Report #1: Decoding Unrelated Business Taxable Income (UBTI) within an IRA

  • Specific citations for the Internal Revenue Code as it relates to UBIT and IRAs
  • What are UBTI and UBIT?
  • How is UBTI calculated?
  • Tax and Filing Form 990-T
  • UBIT at the State Level
  • UBIT and Multiple IRAs

Report #2: Understanding Unrelated Business Taxable Income within an IRA 

  • When does UBIT apply?
  • Guidelines for using debt-financing in an IRA

Understanding Risk and Insuring You are Investing in a Legitimate Self Directed Investment

It is our priority to help you make sense out of the benefits and risks of self directing IRA's. While we do not recommend Self Directing for every client and we do not think self directing is good for everyone, we  want to educate you on red flags and warning signs of bad investment schemes.

Red flags could include: 

  • A property you have not seen or cannot verify existence. 
  • A business you have not had audited by a professional CPA and or attorney. 
  • A business owned by an advisor giving you a recommendation.  
  • A small business that just started. 
  • A real estate development that does not have any documentation.

These are just a few red flags. There can be literally hundreds, so please use common sense and make sure you understand or have experience in an investment you are considering.

Kerr Wealth Management and it's advisors do not solicit investments that could be held in a self directed IRA. Our priority - making sure a self directed investment makes sense with your plan and that you understand the risks, opportunities and how to properly structure an alternative investment or real estate property inside of your IRA.  The Advisors at Kerr Wealth Management may assist your real estate agent or CPA in developing a cash flow model and investment model of an asset you have identified. 

Debunking The Myths