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Mark D
Mark D, Enrolled Agent
Category: Tax
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Experience:  MBA, EA, Specializing in Business and Individual Tax Returns and Issues
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Can a non-profit church rent space to a for profit organization

Resolved Question:

Can a non-profit church rent space to a for profit organization that holds classes in the facility? Will this impact the non profit status?
Submitted: 4 years ago.
Category: Tax
Expert:  Mark D replied 4 years ago.
Customer

Is the property you are renting debt-financed?

Regards,

Mark D
Customer: replied 4 years ago.
Not certain - but you could you provide the answer to both scenarios? Most likely it is debt financed (meaning they have a mortgage on the church right?).
Expert:  Mark D replied 4 years ago.
Customer

A mortgage would be debt-financed, correct.

If not deb-financed, the income would not be taxable per IRC Section 512(b).

If the rental income is derived from debt-financed property that is subject to outstanding acquisition indebtedness incurred in acquiring or improving the property, there could be tax implications. There are some exemptions that would still exclude the rental income form taxation. One is where more than 85 percent of the use of the debt-financed property is devoted to the church's exempt purposes (see Income Tax Regulation §1.514(b)-1(b)(1)). A second exception is where the rent is received from a related organization for an exempt purpose use (see ITR §1.514(b)-1(c)(2)). I do not think the latter would apply since you said this is a for-profit renter.

If you still determine the rental income is taxable, there is a complicated calculation as to how much Unrelated Business Income Tax (UBIT) would be reported and owed using Form 990-T. If this is the case, you should consult a local tax professional with your exact details.

Please let me know if you have further questions.

Regards,

Mark D
Customer: replied 4 years ago.
So they are not breaking any rules by renting to a for profit - it will just mean their may be tax implications as to how the income is reported? Correct?
Expert:  Mark D replied 4 years ago.
Customer

That is correct (from an IRS perspective). Many non-profits have unrelated taxable business income. You just need to ensure it is properly reported on Form 990-T.

Regards,

Mark D
Mark D, Enrolled Agent
Category: Tax
Satisfied Customers: 989
Experience: MBA, EA, Specializing in Business and Individual Tax Returns and Issues
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