Academic journal article Journal of Accountancy

Partnership Investment Taxed to IRA

Academic journal article Journal of Accountancy

Partnership Investment Taxed to IRA

Article excerpt

According to Internal Revenue Code section 408(e)(1), amounts an IRA earns are generally tax deferred until distributions are made. However, in certain instances, IRAs are not tax deferred.

In private letter ruling 9703026, an individual's IRA purchased a limited partnership interest in a nonpublicly traded partnership. The partnership served independent tire retailers and financed the construction of a warehouse and leased its floor space to an unrelated party. The loan to finance the warehouse remained outstanding. As a limited partner, neither the individual nor the IRA custodian could participate in the management of the partnership.

IRAs with unrelated business taxable income (UBTI) are subject to tax under IRC section 511. UBTI is gross income less any directly related expenses an organization derives from an unrelated trade or business. Section 512(b)(3) excludes rents from the definition of UBTI, but section 514(a)(1) includes any gross income from debt-financed property. For an IRA subject to section 511, an unrelated trade or business is any trade or business regularly carried on by an IRA or partnership of which it is a member. …

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