What is UBIT?


First of all, let’s clear up what UBIT stands for… UBIT stands for Unrelated Business Income Tax.

UBIT is a tax that was instituted in order to level the playing field when a tax-exempt organization engages in a business activity.
Imagine a University purchasing a Subway franchise.  Because the University is a tax-exempt, it wouldn’t be very fair to the fellow who owns the Subway across town, to pay taxes on everything he makes, while the University pays no tax.
Congress passed legislation in 1950 out of concern that tax-exempt organizations would have an unfair advantage over for-profit companies that had to pay tax.

When It Applies

UBIT applies when an Plan engages in a trade or business.  Were you to purchase a coffee shop with your Solo 401(k), it would trigger UBIT.  Were the Plan to buy a farm or ranch, the operation of the farm or ranch would trigger UBIT.

How Its Calculated

When UBIT is triggered, the tax that is due, is due at the trust rate.  Solo 401(k) are technically tax-exempt trusts, so any tax the Plan might owe is going to be calculated at the trust rate. It is best to consult a tax professional to ensure the tax is correctly calculated and reported.


Solo 401(k)s are EXEMPT from UDFI for Real Estate!

UBIT & UDFI are governed by 26 USC § 512, however because of two exemptions in 26 USC § 511(a)(2)(A) & 26 USC § 514(c)(9)(C)(ii), 401(k)s are not subject to UDFI on leveraged real estate transactions.
So, not only can your Solo 401(k) secure a loan to purchase property (of any type), the profits that accrue from that financed property come right back to the 401(k) tax-deferred.  If you’re financing property through your Roth Solo 401(k), the profits are tax-free.
In other words, you’re using someone else’s money, and the profits are tax-deferred or tax-free, depending on which side of the Solo 401(k) you’re using.  How cool is that?

We’re Here to Help

We are always happy to talk with you about UBIT & UDFI.   If you have an investment in mind and wonder if it might be subject to UBIT, call us.   We’re available to you, even after we set you up.  If your CPA is unfamiliar with these issues, we’ll be happy to refer you to the one we use.

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Jordan Sheppherd and Steve Sheppherd

Jordan Sheppherd, Owner

Check Book IRA, LLC

Redmond OR | Scottsdale AZ | Minneapolis MN
Toll Free:  (800) 482 2760
(pictured from left to right: Jordan Sheppherd, Steve Sheppherd, Owners of Check Book IRA)