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What is UBIT Tax and Why should you care?

Commercial real estate investing is a lucrative opportunity that can provide significant returns for investors. However, as with any investment, there are taxes that must be considered. One of the taxes that may apply to commercial real estate investing is the Unrelated Business Income Tax (UBIT).

UBIT is a tax that applies to income earned by tax-exempt organizations, such as nonprofits and charities, from business activities that are unrelated to their tax-exempt purpose. However, UBIT can also apply to individuals and entities that invest in certain types of tax-advantaged accounts, such as individual retirement accounts (IRAs), if they earn income from activities that are considered unrelated to their account’s tax-advantaged purpose. In the context of commercial real estate investing, UBIT may apply if an investor uses a tax-advantaged account to invest in a property that generates income from an unrelated trade or business. For example, if an investor uses an IRA to invest in a commercial property that includes a restaurant, the income generated from the restaurant may be subject to UBIT. The significance of UBIT in commercial real estate investing lies in the potential tax liability it creates for investors. UBIT is calculated at the trust tax rate, which is currently 37% for income over $13,050, and there is also a $1,000 threshold for UBIT. This means that if an investor earns more than $1,000 in unrelated business income from their tax-advantaged account, they may be subject to UBIT.

To illustrate the potential impact of UBIT, consider the following example. Suppose an investor uses their IRA to invest in a commercial property that generates $50,000 in rental income per year, but also includes a restaurant that generates $5,000 in net income per year. If the investor’s IRA holds a 50% interest in the property, then the investor’s share of the restaurant’s net income would be $2,500 per year. This income would be subject to UBIT at the trust tax rate, resulting in a tax liability of $925.

It is important to note that UBIT is only applicable to income earned from activities that are considered unrelated to the tax-advantaged account’s purpose. For example, rental income from a commercial property that is leased to a business that is in the same industry as the tax-advantaged account’s purpose would generally not be subject to UBIT.

In conclusion, UBIT is a tax that investors in commercial real estate should be aware of, particularly if they are using tax-advantaged accounts to invest. UBIT can create a significant tax liability for investors who earn unrelated business income from their investments. Therefore, it is important for investors to consult with a tax professional to understand the potential impact of UBIT on their investments and to ensure they are in compliance with all applicable tax laws.

Make the wise decision!

Jay Kennedy

Sovereign Sage

Commercial Real Estate Investor

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