UBIT + does it change the cost basis of traditional ira.
does paying UBIT increase the cost basis required to figure out tax at the time of distribution in future?
I believe it should as otherwise it will be double tax, which does not happen with trusts?
Also is long germ gain in property value
to the extent it is debt financed is taxed at trust level as ordinary or capital gain income?
Permalink Submitted by Alan Spross on Sun, 2009-05-24 23:09
There is no increase in the basis of an IRA that incurs UBIT. The only reason allowed to file an 8606 adding basis to an IRA is making non deductible contributions or rolling over after tax employer plan distributions. The payment of a tax by the IRA does not add basis, despite a dual tax existing on the same income.
The UBIT rates are the compressed ordinary income rates of a trust, not lower LTCG rates.
Permalink Submitted by mk foss on Mon, 2009-06-01 00:26
I agree with Alan but I’m not sure that I understood the original question.
There is no basis created by payment of UBIT as Alan said. The UBIT must be paid by the IRA; if the IRA owner were to pay the tax it would be an excess contribution subject to penalty tax.
If the IRA has long-term capital gains as part of the UBI, the trust tax rules are followed. The trust tax rates on long-term capital gains are the same as those that apply to individuals. The 25% tax rate that applies to individuals who have claimed depreciation on depreciable real property also applies to trusts.
When income is withdrawn from the IRA it is all subject to ordinary income tax wheter UBIT was paid or not and whether the funds withdrawn are from IRA contributions, earnings or gains.