What?
Unrelated business taxable income (UBTI) rules could apply
to your self-directed IRA, which subjects that income to an unrelated business
income tax (UBIT).
Why?
The UBTI rules are a way for the IRS to prevent charities
and certain self-directed IRA business activities from having an unfair
advantage due to their tax-advantaged status (Congress really intended IRA
investments to be passive and not compete with regular businesses).
When?
UBIT applies to the taxable income generated from any
unrelated trade or business regularly carried on by an organization. Short-term
and intermittent activities are usually exempt but certain seasonal activity is
considered “regular” for purposes of this tax.
How much?
If the UBTI rules are triggered by your self-directed IRA,
trust tax rates are used so in 2015 a tax of up to 39.6% could be imposed on
the income deemed generated by unrelated business that is regularly carried on.
Exclusions from the
UBIT tax include:
- Dividends paid to the IRA as a result of the IRA owning C Corporation stock
- Rent from real property
- *be careful not to trigger a prohibited transaction!
- Interest
- Royalties
Examples of
self-directed IRA investments that can trigger UBTI rules are:
- Active trade or business (i.e., clothing store, café, gas station)
- Income through Partnerships and Limited Partnerships (LPs)
- Income through Limited Liability Companies (LLCs)
- *If your self-directed IRA invests in a business using a C Corp, UBTI rules aren’t triggered
- Investments that incur debt financing/income from debt financed property
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