Unrelated Business Taxable Income
When an IRA owes tax: unrelated business taxable income from MLPs and leveraged real estate, the Form 990-T threshold, and how to avoid it.
UBTI in an IRA calculator
What unrelated business taxable income is
IRAs, Roth IRAs and other tax-exempt accounts normally pay no tax, but income from an active trade or business, such as most master limited partnerships (MLPs) held through a K-1, or debt-financed real estate, is unrelated business taxable income (UBTI). If the account has $1,000 or more of gross unrelated business income in a year, the IRA itself (through its custodian) must file Form 990-T and pay tax, at trust rates, on net UBTI above a $1,000 specific deduction. The tax is paid from the IRA, not by you.
How to avoid it
- Hold MLPs in a taxable account, or use MLP funds structured as corporations.
- Avoid leverage in self-directed IRA real estate (debt-financed income is UBTI).
- Dividends, interest, most rents and capital gains from ordinary investments aren't UBTI.
Ask your custodian whether they file 990-T for you; many charge a fee. See K1 tax form.
Common questions
Do IRAs pay tax on UBTI?
Yes, if gross unrelated business income is $1,000 or more; the IRA files Form 990-T and pays from the account.
Are MLPs in an IRA a problem?
They can be, because their business income is UBTI.
Is dividend income UBTI?
No, ordinary dividends, interest and capital gains aren't.
Sources
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General information, not financial, tax or legal advice. Check important numbers with the official source before acting on them.