August 3, 2016

What You Need to Know About UBIT-UDFI

Jon Galane
3 min

Self-directed IRAs are a great way to save for retirement by investing in assets such as real estate, first trust deeds, precious metals, private equity investments, private stock, and private LLCs/LPs. However, if an IRA invests in a leveraged or mortgaged income producing property or a business, there may be taxable income and the IRA would be required to file federal and possibly state income tax returns.

The IRS believes that if tax exempt entities, such as non-profit organizations and IRAs, operate a business they would have an unfair advantage over a taxable entity. Therefore, any business income generated within an IRA is UBTI (unrelated business taxable income). Income from leveraged real estate is not considered business income by the IRS; however there is also UDFI (unrelated debt-financed income) tax that may apply. If the IRA generates rental income that is debt financed, the income attributed to the debt-financed portion of the property may be taxable.

If an IRA has either UBTI and/or UDFI as discussed in the previous paragraph, the IRA may be required to file a federal tax form 990T and potentially a corresponding state form.

It has become apparent to Mountain West IRA, Inc. that many CPAs and tax preparers are unfamiliar with these returns and do not understand the filing requirements. As a convenience to you we have partnered with a CPA firm equipped with the knowledge to process these filings on behalf of your IRA. Upon your request we will provide the CPA firm with your information so that they may contact you.

Due to current compliance guidelines Mountain West IRA, Inc. will be requesting these returns. Please know that you may choose any CPA or tax preparer to prepare these returns on behalf of your IRA and a representative from our office will sign on behalf of your IRA account. All related expenses and potential taxes due must be paid from your IRA.

Mountain West IRA does not offer investment, tax, financial, or legal advice to clients. Individuals who believe they need advice should consult with the appropriate professional(s) licensed in that area.
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