UBIT or not to UBIT

[JAY21]

Reading examples of what constitutes UBIT makes my head spin. Can anyone opine whether ALL debt-financed property (within a qualified plan) that generates rental income constitues UBIT ? or is it somewhat dependent upon how the debt (loan) is structured ?

[Kirk Maldonado]

There are a lot of complex rules that govern UBTI, particularly where real estate is involved. This area doesn't lend itself well to blanket statements; any answers should be very fact-specific.

[Lori Friedman]

You might find it helpful to read the regulations at Reg. Sec. 1.514(b)-1.

[JAY21]

Kirk, how about a response (if you know) of "yes" there are some scenarios that debt-financed property with rental income "might" not trigger UBIT, or "no" UBIT is always triggered in this situation. That's a general call but presumably is not putting anyone on the hook too much. I just want to know whether I need to spend more time on fact specific scenarios or if I can just blanket state to client "it can't be done under any circumstances whatsoever without triggering UBIT".

[Lori Friedman]

Jay21, You absolutely don't want to tell a client that ALL debt-financed rental income will trigger UBIT. Debt-financed rental income should certainly raise a UBIT flag and cause further investigation, but you shouldn't automatically conclude that a debt-financed activity will be taxable. You really do need to get more information from your client.

Here's an example. A 401(a) trust owns a debt-financed office building. The qualified plan uses 90% of the building for its own administrative activities, and it rents the remaining 10% to unrelated, commercial tenants. Because substantially all of the building is used to perform exempt functions (>85%), the entire asset is excepted from treatment as debt-financed property. [Reg. Sec. 1.514(b)-1(b)(1)(ii)]

[JAY21]

Thanks Lori. I just needed to know that more time and research is warranted and "could" prove fruitful. Thanks for the good example.