Investing with an SDIRA - Understanding UBIT, UDFI, and UBTI

Below you'll find some selected excerpts from IRS publication 598. Please note that these are pieces of the text that I think will help you understand and describe UBIT concepts.

The tax on unrelated business income applies to most organizations exempt from tax under section 501(a). These organizations include charitable, religious, scientific, and other organizations described in section 501(c), as well as employees' trusts forming part of pension, profit-sharing, and stock bonus plans described in section 401(a).

In addition, the following are subject to the tax on unrelated business income.

Individual retirement arrangements (IRAs), including traditional IRAs, Roth IRAs, Coverdell IRAs, simplified employee pensions (SEP-IRAs), and savings incentive match plans for employees (SIMPLE IRAs).

• State and municipal colleges and universities.
• Qualified state tuition programs.
• Medical savings accounts (MSAs) described in section 220(d).
• Coverdell savings accounts described in section 530.

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The term “unrelated business taxable income” generally means the gross income derived from any unrelated trade or business regularly conducted by the exempt organization, less the deductions directly connected with carrying on the trade or business. If an organization regularly carries on two or more unrelated business activities, its unrelated business taxable income is the total of gross income from all such activities less the total allowable deductions attributable to all the activities.

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UBTI

Unrelated business income.  Unrelated business income is the income from a trade or business regularly conducted by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity.

Income - Generally, unrelated business income is taxable, but there are exclusions and special rules that must be considered when figuring the income.

Exclusions (meaning not subject to UBIT) - The following types of income (and deductions directly connected with the income) are generally excluded when figuring unrelated business taxable income.

Dividends, interest, annuities and other investment income.  All dividends, interest, annuities, payments with respect to securities loans, income from notional principal contracts, and other income from an exempt organization's ordinary and routine investments that the IRS determines are substantially similar to these types of income are excluded in computing unrelated business taxable income.

Royalties.  Royalties, including overriding royalties, are excluded in computing unrelated business taxable income. …

Rents.  Rents from real property, including elevators and escalators, are excluded in computing unrelated business taxable income. …

Exception for rents based on net profit.  The exclusion for rents does not apply if the amount of the rent depends on the income or profits derived by any person from the leased property, other than an amount based on a fixed percentage of the gross receipts or sales.

Gains and losses from disposition of property.  Also excluded from unrelated business taxable income are gains or losses from the sale, exchange, or other disposition of property…

UDFI

Income From Debt-Financed Property

Investment income that would otherwise be excluded from an exempt organization's unrelated business taxable income (see Exclusions under Income earlier) must be included to the extent it is derived from debt-financed property. The amount of income included is proportionate to the debt on the property.

Debt-Financed Property

In general, the term “debt-financed property” means any property held to produce income (including gain from its disposition) for which there is an acquisition indebtedness at any time during the tax year (or during the 12-month period before the date of the property's disposal, if it was disposed of during the tax year). It includes rental real estate, tangible personal property, and corporate stock.