If there was ever a subject that will stop an accountant is his or her tracks it is UBIT, which stands for unlisted business income tax. The origins of UBIT are obscure. This tax was placed on some taxpayers to “level the playing field” for certain businesses.
The best example of how UBIT is used is for the competition between a non-profit and a for-profit enterprise. The college bookstore sells books to students and others within the structure of their “non-profit” umbrella. The college bookstore, because it is non-profit, is not taxed the same way as a for-profit enterprise. A non-profit does not pay taxes on most operations and therefore can afford to sell books at a lower cost than the for-profit store across the street. Since both the college bookstore and the for-profit bookstore are competitive for the same customers, the college bookstore has the advantage of being rented differently for tax purposes and the advantage of this preferential tax treatment may allow the college bookstore to sell their books for less , thus attracting customers away from the for-profit store.
This is where UBIT jumps in to save the day. The government has placed a tax burden on the non-profit enterprise for running a business, ie selling books, under the main business of running a college. This same philosophy and set of rules is applicable to an IRA's investment in real estate when there is debt related to the purchase of that real estate. So what is bothering the accountants among us?
• The tax rate for UBIT is high, ranging from 26% to 34%.
• Calculation of this tax is, for those not familiar with the rules, complicated.
This sums up the issues. Now, for following through on what these issues mean for someone investing their IRA in real estate, continue reading.