IRS Form 990-T, specifically Schedule E, is the tax form where a charitable organization of retirement account, such as an IRA or Roth IRA would report income that would be subject to the Unrelated Business Taxable Income (also known as UBIT or UBTI) or Unrelated Debt Financed Income tax. In general, only income generated from an active trade or business via a passthrough entity, margin, or real estate acquisition indebtedness would be subject to the UBTI/UBIT tax.
The following is an example offers some insight as to how one would go about calculating the amount of income that would be reportable on the IRS Form 990-T and be subject to the UBIT tax with respect to a self-directed IRA LLC investment using a non-recourse loan.
An individual used a self-directed IRA LLC to purchase a home for $100,000. The IRA holder invested $50,000 of IRA funds and acquired a non-recourse loan for the remaining $50,000 of the purchase price. The home is rented to a tenant who pays $10,000 a year in rent. Expenses are $1,000 for depreciation and $5,000 for other expenses that relate to the home. The average acquisition indebtedness is $50,000, and the average adjusted basis is $100,000. Both apply to the home.
To complete Schedule E for this example, describe the property in column 1. Enter $10,000 in column 2 (gross income allocated to deb financed property), $1000 and $5000 in columns 3(a) and 3(b) (expenses allocated to debt financed property), respectively and $50,000 and $100,000 in columns 4 and 5 (amount of average acquisition debt and average adjusted basis of debt financed property), respectively, 50% in column 6 (sum of column 4 divided by the sum from column 5), $5,000 in column 7 (the sum of column 2 multiplied by the sum of column 6), and $3000 in column 8 (sum of column 6 – 50% multiplied by the sums from columns 3(a) and 3(b) $6,000). Then subtract the amount in Column 7 ($5,000) from the amount in column 8 ($3,000) to determine the unrelated debt fined income amount – $2,000 based off the above example.