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Barbara
Barbara, Enrolled Agent
Category: Tax
Satisfied Customers: 1051
Experience:  Tax Preparer for 16 years; 25+ years experience as a real estate/corporate paralegal.
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Ive just discovered that my IRA may be subject to "unrelated

Resolved Question:

I've just discovered that my IRA may be subject to "unrelated business income tax" because of one and potentially two positions I recently bought. I'd never heard of this until I bumped into an article about it which said that investors often make the "mistake" of investing IRA money in MLPs and REITs, and if the "income" (sometimes the term "distribution" is used) and/or "gain" exceed a certain amount (in a calendar year for "income", and presumably upon sale for "gain") it will be necessary to file additional forms and pay "unrelated business tax income". Further, the claim is that the money will AGAIN be taxed upon withdrawal from the IRA, so in addition to nuisance, there is double taxation. I'm trying to decide whether to sell the positions I have in an MLP and a REIT and just invest money from my taxable account in the positions, since I do like them. I haven't made enough "income" (dividend, that is) yet to trigger what I think is a $1,000 year "ceiling", but I do have a gain of just about $500 in one of them, at today's prices. Could someone please advise me on exactly how this works? If it applies to me, I'd like to get out without triggering anything...
Submitted: 1 year ago.
Category: Tax
Expert:  Barbara replied 1 year ago.

bkb1956 :

I hope this information is helpful to you. Thank you.

bkb1956 :

Thank you for allowing me to be of service to you regarding your tax question. Since an MLP is already structured with special tax provisions, there are special restrictions on holding them in tax-sheltered accounts. Because dividends in an IRA account are not taxed (generally), income investors often seek to house high yield investments in their IRA while housing capital appreciation growth investments in a taxable account. However, with the MLP, the prevailing understanding is that distributions in an IRA are considered unrelated business taxable income (UBTI) and they create a tax liability when they exceed $1000 in a given tax year. For smaller investors, exceeding the $1000 may not be a concern but for high net worth investors it's an important distinction.

Customer:

Thank you for the quick reply. I can get out of the investments before the "distributions" exceed $1000, because I just bought them in February. However, I still have the question on how the gain will be treated. These investments have already increased in value: yesterday

Customer:

s close showed a gain of $519.30 in the MLP and 458.49 in the REIT. This also brings in my question about the other one which is shown on the broker website as a "UIT" also. I have a loss in that one. Can I use the SUM of these? I mean, it's the ACCOUNT that is subject to tax, presumably it's the aggregate UBTI (or loss) for all holdings. If it helps, they are: LGCY (MLP), WSR (REIT), and GNI (the other "UIT"). Any further clarification you can give me would be much appreciated. Please advise, thank you.

Customer:

Thank you.

bkb1956 :

The result of my research is that the $1,000 threshold pertains to the account.

Barbara, Enrolled Agent
Category: Tax
Satisfied Customers: 1051
Experience: Tax Preparer for 16 years; 25+ years experience as a real estate/corporate paralegal.
Barbara and 5 other Tax Specialists are ready to help you
Expert:  Barbara replied 1 year ago.
Thank you for your generous bonus. It is much appreciated. If you have any questions in the future, please feel free to put "for bkb1956" in the subject line, and I will assist you. Best regards.
Barbara, Enrolled Agent
Category: Tax
Satisfied Customers: 1051
Experience: Tax Preparer for 16 years; 25+ years experience as a real estate/corporate paralegal.
Barbara and 5 other Tax Specialists are ready to help you

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