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PDtax, CPA firm owner, business consultant, author
Category: Single Problem
Satisfied Customers: 4674
Experience:  I have been a business consultant and college instructor for years.
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This is for PDTax

Customer Question

Attachment: 2013-08-10_060320_tax_question.doc

This is for PDTax

Submitted: 4 years ago.
Category: Single Problem
Expert:  PDtax replied 4 years ago.

PDtax :

Welcome back. I have reviewed your question and will have a response later today. Thanks for asking for me.

Customer: replied 4 years ago.
Okay, that would be great.
Expert:  PDtax replied 4 years ago.
sorry, I posted an answer yesterday, and don't see it here. I'm away from my laptop, but will look for it and repost.

Customer: replied 4 years ago.
Hi, I will need it soon. I did prepare an answer, but I wanted to compare your response with mine.

By the way, the questions from the pretest that I questioned, he marked those as wrong. I will submit another question asking you to help me dispute the grade. Even though it was homework, the grade has the same weight as a test, a paper, or a final.
Customer: replied 4 years ago.
I have been trying to send you another question. For some reason, the system is sending it to the Homework Section. What can I do?
Customer: replied 4 years ago.

I did not receive your response to this question yesterday as promised. Unfortunately, if I do not receive your response to this today, I won't need the answer. Therefore, if you cannot provide the answer, please have the moderator refund my payment. I am sorry to hear about your truck issues. Good luck! Thanks.

Expert:  PDtax replied 4 years ago.
Sorry the original post did not register. I had tossed my original response, but rebuilt one for you as follows:

Since tax-exempt organizations do not benefit from the deductions that result from depreciation, what options do tax-exempt organizations have in acquiring the use of real estate?

Debt-financed real estate is an issue for tax-exempts. Income from the use of the property, i.e. held out as a rental for others, is considered UBTI and is taxable. There are specific exceptions to the rules, such as if the property is substantially related to tax exempt purposes (85% is the threshold, under IRC 514(b)(1)(A)). This allows for partial use for unrelated income (rent) without UBTI tax expense and reporting. There are other exceptions, such as if the building is used by a related organization, if there is no debt involved in the acquisition or renovation, etc.

Since the tax-exempt only has income tax obligations from unrelated business income (UBTI), real estate as tax shelter does not present many advantages. There are a number of ways real estate ownership can benefit the entity and its ownership, though.

Ownership of the real estate outside of the tax exempt allows for another avenue to release value from the entity to ownership. Owned personally, in joint venture form, limited liability company, related entity, and leased to the tax exempt, can allow for the accumulation of value outside of the organization. The tax exempt leases the property, and a revenue stream for ownership is created out of the entity. The tax advantages of depreciation and ownership inure to ownership.

The tax exempt can still own real estate. Several examples come to mind of donated acquisitions, title exchanges at death, life income contract (IRC Regs. 1.514(b)–1(c)(3) or otherwise through bequest or other transfers. Just because the tax advantages are different does not slow down the desire of tax exempts to expand their footprint and own the buildings they occupy. There is a specific rule for this, the neighborhood land rule (IRC 514(b)(3)(A)) which allows a tax exempt to acquire land around its location with debt and not suffer debt-related consequences if the land will be used for exempt purposes within ten years of acquisition.

Ownership leasing real estate to their tax exempt can take advantage of other tax advantages, such as rehabilitation tax credits that would pass through to ownership. There are disqualified lease rules as defined in Internal Revenue Code Section 168(h)(1)(B)(ii).

To summarize, there are a number of ways a tax exempt can own real estate, including a number that don’t immediately come to mind. Just because the traditional tax advantages may not be needed likely does not deter these organizations from ownership and wealth building through real estate.

Since your deadline may have passed, it's no problem if you want the question closed. Just confirm that and I will let management know on my end.

Yes, yesterday was a busy truck repair day. PD's Dodge needed a u-joint, and it's the first time I had ever done one.

I will follow up on the exam questions after a coffee or two.

PDtax and other Single Problem Specialists are ready to help you
Customer: replied 4 years ago.
Thanks for your response. Unfortunately, I did not have it in time. Regardless, my write up was fine.
Expert:  PDtax replied 4 years ago.
sorry, no explanation for why my original post didn't take.

I appreciate that you accepted my late answer, but that wasn't necessary.

Customer: replied 4 years ago.
Don't worry about it. I want to be fair.