Nonprofit Law/facility rental

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Question
We are a non profit church organization renting our facility to a non- profit state funded charter school.  We have an existing 16 year old debt, 100 percent of the use of the facilities are used for non profit purposes. Will we have to pay taxes on the rental income that is received from the non-profit school entity?

Answer
On page 9 of
http://www.irs.gov/pub/irs-pdf/p598.pdf we see "Rents from real property... are excluded in computing unrelated business taxable income." However, on pages 14-19 as to Unrelated debt-financed property, we see that, if there is debt-financing (like a mortgage), like you mentioned you have had for 16 years,  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.

Page 16 to the middle of page 17 has "Exceptions to Debt-Financed Property" starting in the first column.  From what you wrote I don't see any exemption that might apply except, possibly the one right at the start "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." Whether general education for youth is one of your direct exempt purposes is a determination of fact and I would be willing to work on your matter, but I would need to spend a substantial amount of time in reviewing your Articles of Incorporation and Bylaws and considering the case law as to what is considered "related" to exempt purposes and that would be beyond the scope of my offer of free services.  If you want to inquire about hiring me for such work, please contact me directly to the email address below.

Harvey Mechanic, Attorney at Law -
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.  

Nonprofit Law

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Harvey Mechanic

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I am an attorney and I volunteer time to answer general questions about U.S. Federal income tax issues of nonprofit 501(c)(3) public charities only. Those questions could be about establishing and maintaining legal requirements for such non-profit organizations in the United States, including Internal Revenue service filings and requirements. I will not be working on this free forum to answer questions about Nonprofit's possible unrelated or for-profit businesses or how to fill out forms. This forum is only for general questions about federal tax law, not as the law applies to your specific situation. If you do not make your question public then I will not be spending much of my donated time on answers that would not benefit the public. If you have other questions, please contact me at Harvey108@hotmail.com I will reply from my email. In any case, do not reveal confidential information to me until after I have contracted with you to provide personal legal services. My responses on this forum are intended to be general statements of law, should not be relied upon as legal advice, and do not create an attorney/client relationship. For me to consider your individual situation and how the law applies, I would need to gather extensive information about the situation. To search my previous answers you can do a Google search by "site:allexperts.com/q/nonprofit" without the quotes and then add your search terms before hitting enter.

Experience

I have been practicing law and especially the law of nonprofit organizations since 1990 when I was admitted to the New York Bar and I have maintained my status with the Bar since that time.

Education/Credentials

B.S. Columbia University in New York City, 1970

J.D. (Law Degree) Brooklyn Law School, 1990 -- Cum Laude.


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