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Taxation of UBIT in IRA

My understanding is that UBIT is due to leveraging done by MLPs which means that a portion of their income relates to debt as a percentage of income and is considered UBIT. Since you are not allowed to borrow within an IRA any income related to borrowing is taxed as UBIT.

An MLP with no debt would have no UBIT to report on line 20V of the K-1.

But some tax preparers have indicated recaptured depreciation creates UBIT at the investor level for a MLP with no UBIT. I would llke to know if this is correct.

I would especially like to know where, in the tax laws, it says recaptured depreciation creates UBIT within an IRA when the MLP has none.

Reply to
Atticus Thomas, CPA
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IRC Sec. 512 governs UBTI. Sec. 512(b)(5) tells you that you can exclude gains from the sale or disposition of real property. This would include recapture of depreciation. Unfortunately, Sec. 512(b)(5) is overridden by sections 1245 and 1250. See regulations 1.1245-6(b) and 1.1250-1(c)(2).

In plain english, recapture of depreciation can trigger UBTI.

Reply to
Alan

IRC Sec. 512 governs UBTI. Sec. 512(b)(5) tells you that you can exclude gains from the sale or disposition of real property. This would include recapture of depreciation. Unfortunately, Sec. 512(b)(5) is overridden by sections 1245 and 1250. See regulations 1.1245-6(b) and 1.1250-1(c)(2).

In plain english, recapture of depreciation can trigger UBTI.

----------- It can trigger UBIT, but the purpose of my question was to determine whether an individual investor could have UBIT due to the depreciation allocated to that specific investor who sells his shares while there is no UBIT on Line 20V of K-1s issued to investors who still have their shares.

Reply to
Atticus Thomas, CPA

A limted partner can not have UBTI if the MLP has no UBTI. An MLP could have UBTI if the MLP sold real property at a gain or loss. The gain or loss on the sale would be net of any recaptured depreciation. That gain or loss would be added to all other MLP UBTI and allocated to the partners on Line 20v of the K-1.

Your IRA trustee looks to Line 20v for UBTI. No UBTI, no tax form has to be filed by the IRA.

Reply to
Alan

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