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Public Charities and Unrelated Business Income (UBI) from Rental Income and Real Property

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Activities conducted by public charities (known as 501( c)(3) organizations, based on the section of the Internal Revenue Code) and their related income are generally not subject to state and federal income tax, however, rental income maybe subject to unrelated business income tax ( UBIT), in certain instances.

An exempt organization that has $1,000 or more gross income from an unrelated business must file Form 990-T, Exempt Organization Business Income Tax Return and pay tax on the net taxable income.

In order to avoid unrelated business income tax, the activity conducted by a public charity must meet three tests:

  • The activity must be in conformity with the organization’s tax exempt purpose, if not ,
  • The revenue must not be resulting from the conducting a trade or business and,
  • The activity cannot be regularly carried on.

Even though rental income may not be in conformity with the organization’s tax exempt purpose, it is usually excluded from UBIT unless, one of the other factors below apply:

  • Is the activity considered a trade or business?
    • Providing services are considered rendered to the occupant primarily for their convenience other than those customarily rendered in connection with the rental of rooms or other space may cause the activity to be a trade of business.
  • Is the organization renting personal property?
    • Only rental of Real Property is excluded from UBIT
    • Rental contracts containing both rental of real property and personal property maybe subject partially or totally to the tax depending upon the facts and circumstances.
  • Is the property debt financed?
    • If substantially all of the property’s use is not directly related to the exercise or performance of an organization’s exempt purpose and the property is financed, it is considered debt-financed property and may be subject to unrelated business income tax.
  • Is the organization related to the lessee by venture of a partnership or joint venture?
    • Rental income received where such a relationship exists is considered “Trade or Business Income” and subject to unrelated business income tax.

These considerations are limited to 501( c )(3) organizations. The rules vary widely dependent upon the type of exempt organization. We suggest that any questions pertaining to real estate within a charity be directed to your Marcum Tax Advisor.

 
 
 
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