UBTI


T

Taemwar

On the Motley Fool and Seeking Alpha and other forums I've seen postings which
imply that UBTI and recaptured depreciation are synonymous.
This has been in connection with owning MLPs in an IRA.

The idea expressed is that if you hold your MLP for several years in an IRA,
even if there is negative UBTI on line 20V every year, you will owe UBTI
because the recaptured depreciation transforms into UBTI upon sale.

I understand that if you sold it in a non-IRA the recaptured depreciation
should be taxed as ordinary income rather than as a capital gain--but why
would it be taxed at all in an IRA unless you transferred it out of your IRA
into a non-IRA account or sold it and took out the money?

Is this transformation of depreciation into UBTI in an IRA correct? If so,
how does the IRA custodian know how much UBTI to report.

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A

Alan

On the Motley Fool and Seeking Alpha and other forums I've seen postings
which
imply that UBTI and recaptured depreciation are synonymous.
This has been in connection with owning MLPs in an IRA.
The idea expressed is that if you hold your MLP for several years in an
IRA,
even if there is negative UBTI on line 20V every year, you will owe UBTI
because the recaptured depreciation transforms into UBTI upon sale.

I understand that if you sold it in a non-IRA the recaptured depreciation
should be taxed as ordinary income rather than as a capital gain--but why
would it be taxed at all in an IRA unless you transferred it out of your
IRA
into a non-IRA account or sold it and took out the money?

Is this transformation of depreciation into UBTI in an IRA correct? If so,
how does the IRA custodian know how much UBTI to report.
See the 10/29/12 thread called "Taxation of UBIT in IRA".
 
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A

Atticus Thomas, CPA

On 11/6/2012 2:43 PM, Taemwar wrote:
On the Motley Fool and Seeking Alpha and other forums I've seen postings
which
imply that UBTI and recaptured depreciation are synonymous.
This has been in connection with owning MLPs in an IRA.
The idea expressed is that if you hold your MLP for several years in an
IRA,
even if there is negative UBTI on line 20V every year, you will owe UBTI
because the recaptured depreciation transforms into UBTI upon sale.
~~~~~~~~~~~~
Someone in Seeking Alpha who writes under the name of Reel Ken
also argues that UBIT is created when you sell your MLP.
He refers to Sec 1245 assets being subject to
recaptured depreciation and seems to assume that when you sell an
investment in an MLP, you are selling a Sec 1245 asset.
The tax rules he cites relate to a sale of Sec 1245 assets by
the MLP not an IRA owner of the MLP. This recapture
could create UBTI but only in connection with the UBTI
reported on Line 20V rather than a selparate, additional
UBTI based on selling your shares of the MLP
MLP.
 

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