Unrelated Business Income Tax (UBIT) related to real estate

Tax exempt organizations still face the prospect of paying taxes on unrelated business income. Income that qualifies for tax meets the criteria of 1) a trade or business for profit, 2) not substantially related to the tax exempt purpose and is 3) regularly carried on with frequency and continuity. Real estate holdings may appear to be a grey area, so I will highlight the rules regarding rental property and capital gains on sales.

Rental property is excluded from UBIT, yet there are levels of exceptions:

–         If the property is debt-financed, it won’t be tax-exempt.

–         If personal services are connected to the rental and amount to more than 50% of total rent, then none of the rent is tax exempt. Examples of personal service are those (beyond normal landlord maintenance and repairs) such as additional cleaning, laundry, catering or other personal services.

–         If personal services connected to the rental are 10-50% of the rent, then the amount of rent attributed to the property only qualifies for tax exemption.

–         If the property is a parking lot and fees are paid by the general public to park there, then the income is taxable.

Capital gains on sales of real estate property are usually tax exempt for nonprofit organizations. Because sales can be complex with regard to financing, be sure to fully explore the ramifications of a sale with your accountant.

Even if no tax is owed, organizations with more than $1,000 of gross UBI must file a Form 990-T.