UBIT and the Church

[Gail in Virginia]

This is a personal question, sort of.  Our church has a house that we were using as an office complex for the church.  We build an addition to the church where the offices are now located, and have decided to rent the house as a residential rental.  Would the income from that be considered UBIT? 

My first thought was yes, but when I look at the instructions for a 990 i see:

Exceptions to UBIT

Even if an activity meets the above criteria, the income may not be subject to tax if it meets one of the following exceptions: (a) substantially all the work in operating the trade or business is performed by volunteers, (b) the activity is conducted by the organization primarily for the convenience of its members or (c) the trade or business involves the selling of merchandise substantially all of which was donated.

In general, rents from real property, royalties, capital gains, and interest and dividends aren’t subject to the unrelated business income tax unless financed with borrowed money.

 

Then I looked at IRC section 512(b)(3), which seems to say rental of real property is excluded from UBIT unless it is either 50% or more personal property being rented, or the lease payments are based on the income earned on the rental, or it is debt financed. So now I am thinking that it is not, and the church would still have no filing requirement.  Does anyone have any other information that contradicts this?  Or confirms this?

[PapaJoe]

I dealt with this years ago with a (non-church) non-profit. Real estate rental is not subject to UBIT unless it is debt-financed. If the church owns the property free and clear of any debt, then no UBIT.

[Gail in Virginia]

That was the answer I gave but then I second guessed myself.  Thanks PapaJoe!

[JohnH]

I remembered this conversation from a few years ago, and glad I was able to bring it back up.  I have a question similar to the topic heading, but facts & circumstances are different.  

What about a church which acquires a recreational facility such as a tennis court, pickleball court, basketball court, etc and rents it out on an hourly basis.  Would that type of rental still fall under the exceptions to the UBIT, or is this a different situation?   (Let's assume the property is not financed due to it being gifted or acquired through a will or a cash purchase). 

[Abby Normal]

It's not specifically excluded, so I'd say it's UBI.

https://www.irs.gov/charities-non-profits/charitable-organizations/unrelated-business-income-tax-exceptions-and-exclusions