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Buy Blackstone Stock Without Triggering UBTI Tax

Blackstone Stock

Good News – You Can Now Buy Blackstone Stock With IRA or 401(k) Funds Without Triggering the UBTI Tax

On Thursday, April 18, 2019, Blackstone LP announced that it will vacate the partnership structure and become a corporation, a move some publicly traded peers have taken in an effort to expand the ownership of Blackstone stock. In other words, Blackstone, one of the largest and most successful hedge funds, will become a C Corporation by abandoning its current partnership structure.

In general, when it comes to using an IRA or 401(k) plan to make investments, most investments are exempt from federal income tax. This is because an IRA is exempt from tax pursuant to Internal Revenue Code (IRC) Sections 408 and 512. These exempt most passive forms of investment income generated by an IRA from taxation, such as interest. Some examples of exempt type of passive income include:

  • Interest from loans
  • Dividends
  • Annuities
  • Royalties
  • Most rentals from real estate
  • Gains/losses from the sale of a capital asset, such as real estate

UBTI Tax

However, in a number of instances, a relatively unknown tax called the Unrelated Business Taxable Income, also known as UBIT or UBTI, may be triggered when a retirement account invests in certain types of transactions. In general, the UBTI tax is triggered in three types of investment categories involving a tax-exempt organization or a retirement account:

  1. Using margin to buy stocks or securities
  2. Using a non-recourse loan to buy real estate (there is an exemption for 401(k) plans under certain conditions)
  3. Investing in an active trade or business operated through an LLC or passthrough entity, such as a partnership.

Therefore, if one elects to use his or her IRA or 401(k) funds to purchase shares of Blackstone, they will likely incur UBTI. This is because Blackstone was a partnership and any business income flowing through a passthrough subsidiary of Blackstone can be considered business income subject to UBTI. The same goes for any management fees Blackstone generated via a passthrough entity. With the maximum UBTI tax rate at 37% for 2019, many retirement accounts have stayed away from owning Blackstone shares.

Trump & the C Corp.

Prior to the 2017 Trump Tax Cuts & Jobs Act of 2017, the primary downside of being a C Corporation was the corporate tax rate of 35% and the double tax regime. However, the 2017 Trump Tax Cuts & Jobs Act of 2017 reduced the corporate tax rate to 21% from 35% making the C Corporation far more attractive as a business entity. It’s a more attractive form of doing business from a tax standpoint than before.

The change in C Corporation tax rate is believed to be one of the main reasons Blackstone has elected to abandon the partnership form and become taxed as a C Corporation. This change will have a significant impact on retirement accounts who will now be able to purchase stock in the large hedge fund without triggering the painful UBTI tax.

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