November 29, 2017 10:32 pm

IRA Losses Don’t Pass Through

Generally, income and gains from investments held in an IRA are tax deferred; no annual reporting is required. However, if an investment generates unrelated business taxable income (UBTI) of $1,000 or more for the year, the IRA must pay tax on the UBTI (on Form 990-T). UBTI can result from investments in certain partnerships. What if such investments result in losses?  The losses from these investments do not pass through to the IRA owner and cannot be deducted on his or her return. Take this case:

A taxpayer’s IRA held shares in two master limited partnerships in oil and gas pipelines. These investments generated ordinary losses that were reported on Schedules K-1 which were sent to the IRA. The IRA owner wanted to take the losses on his personal income tax return. The Tax Court said no, and an appellate court agreed (Fish,CA-9, 10/17/17).

There is no provision in the tax law allowing for the pass-through of UBTI losses to an IRA owner’s tax return. According to the court, IRAs, are tax-exempt entities, not pass-through entities. However, UBTI losses can be carried forward or backward to deduct against gains within the IRA (Code Sec. 512(b)(6)).

Tax Glossary

Self-employment tax

Tax paid by self-employed persons to finance Social Security coverage. In 2007, there are two rates. A 12.4% rate applies to a taxable earnings base of $95,700 or less and a 2.9% rate applies to all net earnings.

More terms