Independent Business - Church Property

[Rayce]

Our church is considering renting some space for a private individual to start a for profit day care.  Will this affect the church's non-profit status, will church be liable to pay state, federal and real estate taxes?

[Berend]

I have in my profile that this free forum is only for general questions relating to IRS federal exemption issues of 501(c)(3) organizations. I

See page 9 of

www.irs.gov/pub/irs-pdf/p598.pdf wherein we see "Rents from real

property... are excluded in computing unrelated business taxable

income." However, see pages 14-19 on Unrelated debt-financed

property. There you will see that, if there has been recently

debt-financing(like a mortgate) rents are, at least to some

extent, unrelated business  taxable income. There are exceptions to

that exception listed below in that IRS publication, for example

when the rental amount is computed from net income.

Note from page 16 "If substantially all(85% or more) of the use of

any property is substantially related to an organization's exempt

purposes, the property is not treated as debt-financed property."

The states generally follow the federal rules as to unrelated business taxes.  As for real property tax exemption, that issue is controlled by state law and states may differ somewhat with how they would treat such issues. Even though this forum is not for such state law issues, if you give me your state I may be able to direct you. Some states, like New York would allow a partial exemption, whereas other states would allow no exemption in your case. Thank you for asking.

Harvey Mechanic, Attorney at Law - [email protected]