Purchasing a PTP within your Sep-IRA

Some PTPs will generate positive Unrelated Business Taxable Income (UBTI), either every year, or perhaps only sporadically. Others will usually have UBT losses, but may have income in the year you sell it. If the retirement plan (whether SEP, Roth, traditional, or qualified) ends up with positive UBTI, it will need to file a tax return, just as a charity would have to do. Not what you want in a tax deferred account!

That being said, I looked at the ones I own, and just one of the ten had positive UBTI in 2009. So maybe the thing is to have enough of them in the account that the losses are likely to outweigh the income.

Pro: No need to deal with Schedule K-1. Just be sure there's no UBTI.

What form do you file to report the UBTI?

Who pays the tax -- the IRA or you?

Isn't a tax return required only if the UBTI is greater than $1,000?

Are UBTI losses carried forward indefinitely?

What's an example of a PTP that generates UBTI? Or what is an example of unrelated business income?

You should send the K-1 to the custodian and request he handle the tax aspects of UBTI. Broker will file and pay taxes for UBTI.o

And charge you for the service.

The custodian will pay the tax out of the IRA, and may take his fee from you or from the IRA, usually the IRA, and usually you won't even be asked.

If there's just a single custodian who has vision into all your K-1s, it's not all that difficult.

The problem arises when several custodians are involved, and you have less than a total of $1000 UBTI with any one custodian but more than $1000 total.

You can be sure the charges from the custodians will be, how to say it, High!

Yes.

So if your 2 IRA have $600 in UBTI each then how do you let them know them must file? Or will they file regardless of the amount?

If they file regardless of the amount, is it just an information return or is tax actually paid?

And you said the fees will come out of your IRA, but what if your IRA is full invested in stocks or has no cash?

Art, maybe you can help. I've spent a lot of time digging around, starting with the 990-T instructions, and reached the conclusion that each IRA is a separate taxpayer unaffected by what went on in the beneficiary's other IRAs, even those at the same custodian. It's really one of those angels/pinhead issues, but I'm curious how you reached your conclusion.

On a side note, unless I missed it, nobody has answered the question about what generates UBTI. I pretty much assume that if there's positive operating income, it's UBTI.

Phil Marti VITA/TCE Volunteer

They should not file if total UBTI is under 1000, but making them aware of total UBTI is your job.

If the custodian needs to sell off some stocks, he will.

You have delegated to him this power.

I've been told this more than once at some continuing educ seminars, from speakers I rely on and would recommend.

I've seen a small list of things that generate UBTI, and have seen UBTI on Oil/Gas PTPs but I'm sure they're not the only source.

What were some of the things on the list?

At

they say:

UBIT was implemented to keep the playing field even between plans that open businesses and the typical small business owners. If a plan or self-directed IRA was able to purchase a business and did not have to pay any taxes, it would be able to deliver an identical product at a discount. UBIT mitigates that risk for the typical business owner.

That kind of makes sense, but a C corp will not have UBIT (because they only pay dividends) yet a PTP will -- but they're kind of the same thing from an end user perspective, that is a business.

At

they say dividends, interest, royalties, qualifying rents, capital gains are exempt from UBTI. Good, because that's what stocks, mutual funds, and cash in the IRA will generate. But if these arise from debt-financed property, then it will generate UBTI. So I guess if you buy stocks on margin in the IRA, then UBTI will incur. Or if you buy a house in your IRA, assuming that can be done, you will have UBTI.

Am I on the right track?