UBIT Question

[taxxcpa]

Here is a link to an article which I believe incorrectly equates recaptured depreciation with UBIT

http://boards.fool.com/mlp-ubti-held-in-an-ira-question-30045012.aspx?sort=postdate

If I have an investment in a LLC in my IRA and it has negative UBIT; e.g. LINE Energy, and my capital account is decreased by depreciation, I would then have a low basis. If I sell it in my IRA, I do not think I would have UBIT unless I sold it in some future date when the UBIT was a positive amount for ALL investors.

According to the Motley Fool, however, even if all people who still own LINE have negative UBIT, the sale within an IRA would generate UBIT subject to tax within the IRA.

Does anyone know about this?

[kcjenkins]

I believe the article is correct. It's the reason I advise all my clients not to invest in MLPs in their IRAs.

[taxxcpa]

Do you really believe that recaptured depreciation is UBIT when the MLP itself has no UBIT at all ?

My understanding is that UBIT is due to leveraging done by MLPs which means that a portion of their income relates to debt as a percentage of income and is considered UBIT. Since you are not allowed to borrow within an IRA any income related to borrowing is taxed as UBIT.

An MLP with no debt would have no UBIT to report on line 20V of the K-1.

But if recaptured depreciation creates UBIT at the investor level for a MLP with no UBIT, then I would like to know where, in the tax laws, this ls stated.