Are there any special taxes that apply when I use debt financing to purchase real estate?
Unrelated business taxable income (UBIT) would apply. Due to non-profit organizations encroachment on the business opportunities normally engaged in by taxable businesses, the IRS code was altered to include the provision in 1950. Essentially, if a tax exempt entity (e.g., non-profit) engages in a business that is unrelated to its primary purpose, any income derived from such business will be subject to UBIT. IRAs are also subject to UBIT if they conduct unrelated businesses that produce profits. For example, if an IRA forms an LLC to buy and operate a dry cleaner or gas station, businesses obviously unrelated to the primary purpose of an IRA, the net income will be taxed as UBIT (at the trust tax rate because an IRA is considered a trust under the tax code in this purpose). The change in the code was intended to level the playing field between tax exempt organizations and for-profit organizations conducting the same businesses.
