What is UBTI & UDFI?
Unrelated Business Taxable Income (UBTI) & Unrelated Debt-Financed Income Tax (UDFI) as they relate to real estate purchases. Income earned by a tax-exempt entity that does not result from tax-exempt activities. The entity may owe taxes on this income. In 1950, the IRS code was amended to include a provision called unrelated business taxable income or RE_UBTI. The tax on such income is called unrelated business income tax (UBIT). 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
