--- title: "Unrelated Business Taxable Income (UBTI) | Altss Glossary" description: "Unrelated business taxable income (UBTI) is income a US tax-exempt organisation earns from a trade or business it regularly carries on that is not…" canonical: "https://altss.com/glossary/ubti" --- Glossary · Legal, regulatory & tax # Unrelated Business Taxable Income (UBTI) Unrelated business taxable income (UBTI) is income a US tax-exempt organisation earns from a trade or business it regularly carries on that is not substantially related to its exempt purpose, including income from debt-financed property; Internal Revenue Code section 511 taxes it despite the investor's exemption. Publisher: Altss LLCContent modified 2026-10-02 ALTSS-REG-026 Pensions, endowments, foundations and individual retirement accounts (IRAs) generally pay no US income tax on most investment income: dividends, interest, royalties, most rents and capital gains. Income from a business unrelated to their exempt purpose, or from property bought with borrowed money, is different: it is UBTI and taxed. Because private funds are usually partnerships, they pass UBTI through to tax-exempt investors, which is why fund documents and side letters address it and why blocker corporations exist. ## Formula ### Unrelated debt-financed income (section 514) ``` UDFI = income from the debt-financed property × (average acquisition indebtedness ÷ average adjusted basis) ``` `I_prop` gross income from the debt-financed property for the year (allowable deductions are taken in the same proportion) `AI (average)` average acquisition indebtedness on the property during the tax year `AB (average)` average adjusted basis of the property during the tax year Statutory ratio from section 514(a)–(b). The debt-financed portion is included in UBTI even if the income is of a passive kind (rent, interest, dividends, gains) that section 512(b) would otherwise exclude. Section 514(c)(9) removes certain real-property debt for qualified organisations such as qualified pension trusts and educational institutions, subject to conditions. ## Jurisdiction and status US federal income tax. Section 511 of the Internal Revenue Code imposes tax on the unrelated business taxable income of organisations otherwise exempt from tax; section 512 defines and computes UBTI and lists exclusions; section 513 defines an unrelated trade or business; section 514 adds unrelated debt-financed income. For taxable years beginning after 31 December 2017, section 512(a)(6) (added by Pub. L. 115-97) requires an organisation with more than one unrelated trade or business to compute UBTI separately for each, and the UBTI of each cannot be less than zero, so losses in one activity cannot offset income in another. An exempt organisation or individual retirement account with gross income of $1,000 or more from a regularly conducted unrelated trade or business files Form 990-T (instructions for 2025). ## Passive income that is normally excluded Section 512(b) excludes dividends, interest, payments with respect to securities loans, annuities, royalties, most rents from real property, and gains from the sale of property other than inventory or property held primarily for sale to customers. These exclusions are what allow tax-exempt investors to hold most private fund interests without tax. Under section 512(b)(4), these exclusions do not apply to income from debt-financed property, which is included in UBTI in the proportion set by section 514. ## How private funds generate UBTI - **Operating pass-through investments.** A fund that holds a limited liability company (LLC) or partnership running an active business passes that business's income through to its partners as UBTI. - **Fund-level borrowing.** Debt used to acquire investments makes them debt-financed property. Credit lines, including [subscription lines](https://altss.com/glossary/subscription-line), can raise the question when borrowings are outstanding against investments. - **Leveraged real estate.** Mortgage-financed property produces unrelated debt-financed income (UDFI) unless the section 514(c)(9) exception applies to the investor. - **Hedge fund margin.** Securities bought on margin are debt-financed. Buyout funds that invest through corporations and unlevered credit funds earning interest usually generate little UBTI; real estate, infrastructure and energy funds with pass-through holdings or leverage often generate more. ## How investors and managers manage it Tax-exempt LPs negotiate LPA covenants or [side letters](https://altss.com/glossary/side-letter) requiring the manager to use reasonable efforts to avoid UBTI, or to hold UBTI-generating investments through a [blocker corporation](https://altss.com/glossary/blocker-corporation). A blocker converts UBTI into dividends, which are excluded, at the cost of corporate tax inside the blocker. Funds may also run separate parallel vehicles for tax-exempt investors. Investors see their share of UBTI on the Schedule K-1 the fund issues each year. ## Legal definition and market usage In market usage "UBTI" covers both the tax base (UBTI) and the tax on it, sometimes called unrelated business income tax (UBIT). It concerns US tax-exempt investors. Foreign investors face a parallel but distinct issue, effectively connected income; blockers are often designed to address both. ## Worked example ### Illustrative debt-financed real estate income A fund partnership owns a building with an average adjusted basis of $100m and average acquisition debt of $60m during the year, and earns $8m of net rental income. A tax-exempt private foundation holds 10% of the fund. Its share of net income is $0.8m. The debt-financed fraction is $60m ÷ $100m = 60%, so **$0.48m** is UBTI to the foundation, although rent would otherwise be excluded. If the investor were a qualified organisation under section 514(c)(9), such as a qualified pension trust or an educational institution, and the investment met that section's conditions, the acquisition debt would not count. The figures are illustrative; actual treatment depends on the investor and the facts. Examples are illustrative; figures are not market data. ## Not the same as - Effectively Connected Income: Effectively connected income (ECI) concerns foreign investors' income connected with a US trade or business; UBTI concerns US tax-exempt investors. - [Blocker Corporation](https://altss.com/glossary/blocker-corporation): A blocker is the structure commonly used to prevent UBTI from reaching tax-exempt investors; UBTI is the income it blocks. ## Common mistakes - Assuming all private fund income is passive investment income. - Forgetting that borrowing to acquire investments can turn dividends, interest, rent or gains into UDFI. - Netting UBTI losses from one activity against income from another after 2017. - Assuming IRAs are outside UBTI. IRAs are subject to tax on unrelated business income. ## Edge cases - The section 514(c)(9) real-property exception is available only to qualified organisations, and partnerships with mixed partners face further allocation conditions. - An investor's own borrowing to fund its commitment can make its fund interest debt-financed property. ## Questions ### Do subscription lines create UBTI? They can. If fund-level borrowing remains outstanding against investments it helped acquire, the investments can be debt-financed property. Managers therefore track how long facilities stay drawn and how proceeds are used, and investors often negotiate UBTI covenants. ### How does a blocker prevent UBTI? The fund holds the investment through a corporation. The corporation pays tax on the business income and distributes dividends, which tax-exempt investors receive as excluded passive income. ## Sources - [26 U.S.C. 512 - Unrelated business taxable income](https://www.law.cornell.edu/uscode/text/26/512). U.S. Congress (Internal Revenue Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-01). Status: in force (checked 2026-10-01). 26 U.S.C. 512(a)(1), (a)(6)(A)-(C), (b)(1)-(5), (c)(1); Amendments note 2017 (Pub. L. 115-97, sec. 13702) — supports: UBTI computation; separate computation per trade or business for taxable years after 2017; exclusions for dividends, interest, annuities, royalties, real-property rents and gains, overridden for debt-financed property; partnership pass-through - [26 U.S.C. 514 - Unrelated debt-financed income](https://www.law.cornell.edu/uscode/text/26/514). U.S. Congress (Internal Revenue Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-01). Status: in force (checked 2026-10-01). 26 U.S.C. 514(a)-(b), (c)(1)(A)-(C), (c)(9)(A)-(C), (c)(9)(B)(vi), (c)(9)(E) — supports: Debt-financed income ratio; acquisition indebtedness incl. reasonably foreseeable later debt; real-property exception for qualified organisations and partnership conditions - [26 U.S.C. 511 - Imposition of tax on unrelated business income of charitable, etc., organizations](https://www.law.cornell.edu/uscode/text/26/511). U.S. Congress (Internal Revenue Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-02). Status: in force (checked 2026-10-02). 26 U.S.C. 511(a)(1)-(2)(A) — supports: Tax imposed on UBTI of organisations exempt under sec. 501(a) - [26 U.S.C. 513 - Unrelated trade or business](https://www.law.cornell.edu/uscode/text/26/513). U.S. Congress (Internal Revenue Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-02). Status: in force (checked 2026-10-02). 26 U.S.C. 513(a) — supports: Unrelated trade or business: not substantially related to the exempt purpose - [26 U.S.C. 408 - Individual retirement accounts](https://www.law.cornell.edu/uscode/text/26/408). U.S. Congress (Internal Revenue Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-02). Status: in force (checked 2026-10-02). 26 U.S.C. 408(e)(1) — supports: IRAs subject to the section 511 tax - [Instructions for Form 990-T (2025), Exempt Organization Business Income Tax Return](https://www.irs.gov/instructions/i990t). Internal Revenue Service, Instructions for tax year 2025 (accessed 2026-10-02). Status: current (checked 2026-10-02). Instructions for Form 990-T (2025), Who Must File — supports: Form 990-T filing at $1,000 or more of gross unrelated business income; IRAs file - [Partner's Instructions for Schedule K-1 (Form 1065) (2025)](https://www.irs.gov/instructions/i1065sk1). Internal Revenue Service, Tax year 2025 instructions (accessed 2026-10-01). Status: current (checked 2026-10-01). Partner's Instructions for Schedule K-1 (Form 1065) (2025), Box 20, Code V — supports: Partners receive UBTI information on Schedule K-1 ## Related terms 7 terms - [Blocker Corporation](https://altss.com/glossary/blocker-corporation) - [Endowment](https://altss.com/glossary/endowment) - [Foundation (Charitable Foundation)](https://altss.com/glossary/foundation) - [Subscription Line of Credit](https://altss.com/glossary/subscription-line) - [Side Letter](https://altss.com/glossary/side-letter) - [Real Estate Private Equity (REPE)](https://altss.com/glossary/real-estate-private-equity) - [Leverage](https://altss.com/glossary/leverage) ## Referenced by 5 terms - [Employee Retirement Income Security Act of 1974 (ERISA)](https://altss.com/glossary/erisa) - [Master-Feeder Structure](https://altss.com/glossary/master-feeder) - [Pension Fund](https://altss.com/glossary/pension-fund) - [Real Estate (Asset Class)](https://altss.com/glossary/real-estate) - [Real Estate Investment Trust (REIT)](https://altss.com/glossary/reit) ## Concept record Concept ID ALTSS-REG-026 Classification Legal, regulatory & tax Topics Legal, regulatory & tax Jurisdiction US Version 2.0.0 Last reviewed 2026-10-02 Structured data [JSON](https://altss.com/reference/concepts/ubti.json) Source check Tax statements checked against the cited primary sources on 2026-10-02 ([how](https://altss.com/methodology)). General information, not advice. ## Canonical URL https://altss.com/glossary/ubti