What is “Unrelated Business Taxable Income” (UBTI) and can REIT dividends constitute UBTI?
In very general terms, “unrelated business taxable inclome” or UBTI is income earned by an otherwise tax-exempt entity that is considered taxable income to the entity, typically because it is dervied from a business activity unrelated to the tax-exempt purpose of the entity. For example, an “individual retirement account” or IRA is typically considered tax-exempt, but if it earns UBTI, it must pay tax on that income. In general, REIT dividends do not generate UBTI (at least no more than dividends from non-REIT stocks). See Revenue Ruling 66-106, in which the IRS specifically held that dividends from a REIT generally do not generate UBTI. Nevertheless, there are exceptions to the general rule, such as when a pension plan owns more than 25 percent of a REIT’s stock and in the case of certain mortgage REITs that use financings considered to be “taxable mortgage pools.” Because the answers to these questions are complex, it is important to consult with a competent tax advisor for answers a
