Unrelated business income tax target ordinary income-producing businesses that not paying any corporate tax. When Congress set out directives for the law and in turn the IRS enforcement, they thought it was important to make a distinction which type of income would be exempt and which ones would still have to be subject to taxation.
When related to real estate, UBIT is a tax on real estate activities that are not passive in nature. Rental income and capital gain income from the sale of real estate are exempt from UBIT. There is a special caveat to the capital gain exemption on the sale of real estate which does not allow it to apply when the real property was acquired with the intent to immediately sell it.
What should I know about UBIT?
If your Self-Directed Solo 401(k) or Self-Directed IRA invests in an operating business (Limited Partnership (LP) or LLC) that sells goods or services and generates more than $1,000 in UBIT, the 401(k) or IRA must file IRS Form 990-T and pay the tax due from the 401(k) or IRA.
A C-Corp will pay a corporate tax, so C-Corps do not trigger UBIT. Interest and dividend income are exempt from UBIT. Rental income and real estate capital gains are also exempt from UBIT if the real estate was held for longer than 1 year. The tax rate for UBIT matches the tax rate for trusts.