renting vacant church rooms for profit


S

sandybeth

As with everyone else, churches are being pummelled around in this
economy--higher costs and lower donations.

I’m on the committee to work on ideas to reduce the mortgage debt at
our church. One of our ideas involves renting rooms (in a vacant part
of the church) out for office space. Also renting the Activity Center
for showers, dinners & such, maybe even exercise groups.

Would renting out for profit would jeopardize our non-profit tax
status? The financial details of any such arrangement would not go
thru the church accounts as such, but would be a separate financial
account.

Sandra
 
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S

Seth

sandybeth said:
Would renting out for profit would jeopardize our non-profit tax
status?
It shouldn't. However, the income could be subject to UBIT, and
renting out space might jeopardize your real estate tax exemption.

Seth
 
A

Alan

As with everyone else, churches are being pummelled around in this
economy--higher costs and lower donations.

I’m on the committee to work on ideas to reduce the mortgage debt at
our church. One of our ideas involves renting rooms (in a vacant part
of the church) out for office space. Also renting the Activity Center
for showers, dinners& such, maybe even exercise groups.

Would renting out for profit would jeopardize our non-profit tax
status? The financial details of any such arrangement would not go
thru the church accounts as such, but would be a separate financial
account.

Sandra
The direct answer is: No, the church would not lose its exempt status.
However, it is quite possible that the church could have net rental
income that is categorized as Unrelated Business Income (UBI) and
subject to the Unrelated Business Income Tax (UBIT). This could happen
if the property is subject to acquisition debt. In more simple terms,
if there is a mortgage on the property being rented then some or all of
the net rental income may be subject to tax. No debt... no tax.
In addition, there are exceptions to the tax.
 
A

Avrum Lapin

sandybeth said:
As with everyone else, churches are being pummelled around in this
economy--higher costs and lower donations.

I¹m on the committee to work on ideas to reduce the mortgage debt at
our church. One of our ideas involves renting rooms (in a vacant part
of the church) out for office space. Also renting the Activity Center
for showers, dinners & such, maybe even exercise groups.

Would renting out for profit would jeopardize our non-profit tax
status? The financial details of any such arrangement would not go
thru the church accounts as such, but would be a separate financial
account.

Sandra
If your church was in California you would lose part of the church
exemption from property taxes. More info available if needed
 
P

paulthomascpa

sandybeth said:
As with everyone else, churches are being pummelled around in this
economy--higher costs and lower donations.

I’m on the committee to work on ideas to reduce the mortgage debt at
our church. One of our ideas involves renting rooms (in a vacant part
of the church) out for office space. Also renting the Activity Center
for showers, dinners & such, maybe even exercise groups.

Would renting out for profit would jeopardize our non-profit tax
status? The financial details of any such arrangement would not go
thru the church accounts as such, but would be a separate financial
account.


The renting out of space is not related to your non-profit charitable
religious purpose, so the rental income (profits) are going to be taxable
income to the church (regardless of if there is a mortgage or not). As
another mentioned, it could harm any exemptions for property taxes, at least
on the space being rented out.

One issue to be aware of and consider is the laws you'd break for denying
rents to certain people, businesses, etc based on their activities not being
compatible with your beliefs and religious doctrine. Be careful you don't
run afoul of anti-discrimination laws related to rentals.

Talk to the church lawyer. On both issues.
 
C

Chip Wood

The direct answer is: No, the church would not lose its exempt status.
However, it is quite possible that the church could have net rental
income that is categorized as Unrelated Business Income (UBI) and
subject to the Unrelated Business Income Tax (UBIT). This could happen
if the property is subject to acquisition debt. In more simple terms, if
there is a mortgage on the property being rented then some or all of the
net rental income may be subject to tax. No debt... no tax.
In addition, there are exceptions to the tax.
Believing in the separation of church and state, I support (kinda) the
idea that legitimate churches should not be taxed. But the statement
above makes no sense to me. Why should UBI matter whether or not there
is a debt on the property? If the church rents out space for outside,
non-church use then it has income that should be taxed regardless of
debt obligation. Taken that to extreme, if I pay off the mortgage on a
4-plex then all rental income from that point forward is tax-free? Nonsense.

Chip
 
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A

Alan

Believing in the separation of church and state, I support (kinda) the
idea that legitimate churches should not be taxed. But the statement
above makes no sense to me. Why should UBI matter whether or not there
is a debt on the property?
You'll have to ask Congress. That's what's in Code Sec. 512(b).
 
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Exclusions

Sometimes you need to go directly to the source (i.e. the IRS). Publication 598 spells out how to handle rents and any other income related to an exempt organization. The passages below were copied straight from the publication, but in general NO rents are not included in unrelated business taxable income. And the issue about debt financed property doesn't apply to rents. It only applies to investment income. The issue about rents and other items relates to a controlled organization (for example the an organization that the church controls). If the renter is an outside party then this doesn't apply and therefore there is no rents are included in income (debt-financed or not). See below:

Rents. Rents from real property, including elevators and escalators, are excluded in computing unrelated business taxable income. Rents from personal property are not excluded. However, special rules apply to “mixed leases” of both real and personal property.

Other exceptions. This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later), or to interest, annuities, royalties and rents received from a controlled corporation (discussed under Income From Controlled Organizations, later), investment income (dividends, interest, rents, etc.) received by organizations described in sections 501(c)(7), 501(c)(9), 501(c)(17), and 501(c)(20). See Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs, discussed later for more information.

Investment income that would otherwise be excluded from an exempt organization's unrelated business taxable income (see Exclusions under Income earlier) must be included to the extent it is derived from debt-financed property. The amount of income included is proportionate to the debt on the property.

See publication 598 for full details.
 

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