Discussion:Real Estate in IRA - UBTI?

Does he have to file a separate form to report Unrelated Business Taxable Income, and pay this tax? My research suggests that the IRA custodian, as the fiduciary, should file the form and pay the tax (and most likely pass this through to the client).

Does anyone have experience with sales of real estate in IRA's?

Your best bet is to contact your client's IRA third party administrator (TPA) and find out exactly what kind of investment your client's IRA entered into.

Then determine whether or not the IRA needs to file a 990-T. If the IRA purhased a partnership interest in an LLC that has debt financed real estate then, it is possible, that the IRA will need to file a 990-T. If any tax is due, the IRA, by way of the TPA, will need to cut a check and attach to the 990-T. The tax due, if any, and accounting fees should be paid by the IRA.

Depending on the TPA, they may or may not have informed your client of any tax filing obligations (i.e., 990-T) of the IRA.

The TPAs that I know of don't give out tax advice, they will give you some guidelines but will tell the client to seek outside tax/legal advice.

This is a website for a TPA in Lake Mary, Florida that I work with www.entrustgroup.com Q&A forum, I have linked you up with the Q&A forum.

Full disclosure here, I do sponsor seminars with this TPA as a source of business clients.

Thanks for the feedback. From the looks of the K-1's it looks like the LLC hold individual apartment buildings and shopping centers, which are no doubt financed by debt. Due to that reason, I would suspect that they would have to file a 990-T.

I will contact them and let you know how it goes...to clarify, the IRA would have to file the 990-T and pay the taxes, right? Not the individual?

Do the plans that yuo work with just pass any taxes on sales of real estate in IRA's on to the holders?

Yes, I would agree with your first paragraph.

Yes, the IRA files the 990-T and pays any tax due, not the beneficiary. You prepare the 990-T and if there is tax due, the TPA cuts the check from the IRA funds, payable to Uncle Sam.

I am not sure I quite understand the last sentence...

If the IRA files the 990-T and pays any taxes due, do they bill this back to the beneficiary? I would think that this is the only way they would get the money back.

Just like a 1120 with tax due...the business (IRA) pays that tax, cost of doing business.

The IRA is a trust that can be a separate tax paying entity, so no reimbursement.

Since it is their responsibility, I am not going to go any further because it is not the beneficiaries responsibility.

How do they treat the taxes they pay? Do they simply take this from the clients account and reduce the monetary return that they give to the client?

In my experience TPAs know this business well, i.e, real estate in IRAs and debt, UBI, etc... they just don't want to be on the hook for any tax/legal advice to clients.

Perhaps you can contact me offline and let me know who is the TPA...would be curious to know.

The taxes paid by the IRA are just another expense. For example, if the IRA owns a rental house, and it is debt financed...the TPA receives the rent, the TPA makes the mortgage payment, the TPA pays other bills, etc...and when a 990-T is filed and if there is a tax due, the TPA pays this bill too from the existing funds in the IRA.

The IRA needs to pay the 990-T tax bill, if any, otherwise, if the beneficiary pays the bill...it can be considered an indirect contribution to the IRA that may or may not be allowable.

Now i'm confused. You seem to be directly contradicting Mtm - he states that the IRA pays the tax bill, but you state that the taxpayer individual is responsible for filing the 990-T.

WesR - Noted. As a practice, I document all decisions and discussions with clients that are questionable.

In any case, thank you all for the advice and response. You are what make this board such a good research to the tax and accounting community.

Thanks for answering.

If a C corp, just like receiving dividends from Exxonmobile, Home Depot, etc...no UBTI.

1) A Roth IRA, like a traditional, deductible IRA, can have unrelated business income and therefore pay tax. For example, the Roth buys real estate with nonrecourse debt, any income allocable to nonrecourse debt is subject to UBIT.

2) You need to find out how the LLC is organized, i.e., what is its legal entity...a C corporation or a partnership.

3) IF it is a C corp then you have no problem....dividends are dividends, not subject UBI. 4) If it is organized as a partnership, you may want to "chat" with your TPA, Nations Financial Group and see if they have received a K-1 from the partnership entity. If there is a K-1 then you may have UBI and subject to UBIT.

If it is a partnership, your best course is to talk to Nations and ask questions about the K-1, UBI, etc....

Good Luck.