Calculating the UBTI tax is the gross income “derived…from or on account of” debt-financed property is unrelated business income in an amount equal to the income multiplied by the following fraction (the “debt/basis percentage”):
Average acquisition indebtedness / Average adjusted basis
For example, if the average acquisition indebtedness is $50 and the average adjusted basis is $100, 50 percent of each item of gross income from the property is included in UBTI tax.
The debt/basis percentage is recomputed annually. Normally, the average acquisition indebtedness for any taxable year is the average of the acquisition indebtedness during the portion of the year when the organization owns the property. The average is computed by determining the amount of acquisition indebtedness on the first day during each month on which the organization holds the property, adding these amounts together, and dividing by the number of months and partial months during the year when the property is held. Assume a Self Directed IRA LLC borrows $300 to purchase a building on July 10 of year one and makes principal payments on the debt of $20 on July 20 and on the twentieth day of each succeeding month during the year. Average acquisition indebtedness is $250 (sum of $300, $280, $260, $240, $220, and $200, divided by six). However, in determining the includable portion of gain or loss on a disposition of the property, the average acquisition indebtedness is the highest amount of acquisition indebtedness during the 12-month period ending with the date of the disposition.