What in the world is a UBIT?

No, it’s not an exotic animal.  UBIT stands for Unrelated Business Income Tax and is the tax paid on the income received by investment property purchased through an IRA that was purchased with a mortgage or has since acquired a mortgage.  If the property was purchased without a mortgage and remains free and clear, the UBIT does not apply.

The UBIT is a tax on income after expenses and other deductible items are deducted from the income.  The first $1000 of net income is not subject to UBIT tax at all.  The amount of UBIT owed is determined by the percentage of the property subject to mortgage (you put 50% down so 50% is subject to mortgage, for example) and the average tax basis of the property during the preceding 12 months.  That is then related to the net income produced by the property minus the first $1000 of income.  Does this sound complicated?  Thank our friends at the IRS.

That’s all fine when you own the property, but how does UBIT affect the sale of the property?  UBIT will be owed on the sale of the property if the property has had a mortgage within the 12 months previous to the sale.  Here’s an example:

You bought a property for $100,000 and sold it for $200,000.  At the time of sale there was a $50,000 mortgage still owed on the property or 25% of the sales price.  UBIT will then affect 25% of the gain or $25,000.  However, instead of being taxed at the usual UBIT rate, it will be taxed at the capital gains rate currently in effect.  In the above example if the capital gains rate is 20%, the tax owed would be $5,000.

If the idea of paying taxes on property purchased through your IRA bothers you, you can pay off the mortgage 12 months before selling.  The UBIT only goes back 12 months.  No mortgage for 12 months means no UBIT.

Need more information or have questions?  Fill out the easy form below.