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1. Exclusion of rent from real residential or commercial property from unrelated business taxable earnings

Exclusion of lease from genuine residential or commercial property from unrelated organization gross income

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Rental earnings from genuine residential or commercial property received by exempt organizations is usually left out from unrelated organization taxable earnings (UBTI). However, rent may not fall under the exclusion in different scenarios, such as when considerable individual services are provided to lessees, if more than 50% of the rent is for the usage of personal residential or commercial property, if the residential or commercial property is debt-financed earnings or leased to a regulated entity, or if the organization is exempt under Sections 501( c)( 7 ), 501( c)( 9) or IRC 501( c)( 17 ).

IRC Section and Treas. Regulation

- IRC Section 512( b)( 3) Rents from real residential or commercial property excluded from UBI.
IRC Section 512( b)( 13) Special rules for specific quantities gotten from regulated entities.
IRC Section 514( b)( 1) Definition of debt-financed residential or commercial property.
Treas. Reg. Section 1.512( b) -1( c) Rent modification

Resources (court cases, Chief Counsel Advice, Revenue Rulings, internal resources)

- Ocean Pines Ass 'n v. Comm' r, 135 T.C. 276 (2010) The Tax Court held that income received by a 501( c)( 4) house owners' association's operation of parking lots was not rent from genuine residential or commercial property left out from unassociated business taxable income by Section 512( b)( 3 ).
Gundersen Med. Found. v. United States, 536 F. Supp. 556 (W.D. Wis. 1982) A medical academic and research foundation exempt under area 501( c)( 3) rented some of its buildings, which went through a mortgage, to a personal non-exempt center. The court found that the rental income from debt-financed residential or commercial property was not unassociated business income, under Section 514( b)( 1 )( A)( ii), since the clinic's usage of the leased genuine (and personal) residential or commercial property in providing medical services and training medical students was considerably related to the structure's exempt functions.
Rev. Rul. 69-69, 1969-1 C.B. 159 The leasing of apartments and the operation of a dining hall by an exempt organization make up unassociated trades or services where occupying the houses is not mostly for the convenience of its members.
Rev. Rul. 80-297, 1980-2 C.B. 196, amplifying Rev. Rul. 76-402, 1976-2 C.B. 177, holds that an exempt school that uses its tennis facilities for 10 weeks in the summer season as a public tennis club operated by workers of the school's athletic department is participated in unassociated trade or company and the income made is not excludable from unassociated company taxable income as lease from genuine residential or commercial property. If, nevertheless, the school leases the tennis centers for a repaired charge to an unrelated person who runs a tennis club for the public, the school is still taken part in unassociated trade or service, however the lease income is omitted from unrelated business gross income as rent from real residential or commercial property.
Rev. Rul. 80-298, 1980-2 C.B. 197 holds that income from the lease of a football stadium by a tax-exempt university to a professional football team is not lease from genuine residential or commercial property excluded under Section 512( b)( 3) because the university offered substantial services (which did not make up customary services) for the convenience of the group. 1989-B EO CPE Text PDF - Rents from Real Residential Or Commercial Property - Rendering Services

Analysis

According to IRC Section 512( b)( 3 ), leas from genuine residential or commercial property are omitted from unrelated organization taxable earnings. Real residential or commercial property is land and any structures or other structures permanently connected to land, and consists of any residential or commercial property described in IRC Section 1245( a)( 3 )( C). However, there are a number of situations in which the exemption does not apply. These may consist of:

Rent, if the rental of centers consists of the arrangement of services, such as food and beverage sales. Rental payments for using rooms or area where services are likewise rendered to the occupants does not constitute lease from real residential or commercial property. Services are thought about rendered to occupants if they are mostly for their benefit. Those services typically or usually rendered in connection with the rental are not thought about rendered to occupants. See Treas. Reg. Section 1.512( b) -1( c)( 5 ),

For instance, the supplying of maid service constitutes service to the occupant, whereas the furnishing of heat and light, the cleansing of public areas, and the collection of garbage, are not considered as services rendered to the resident. Rental income from hotel spaces, storage units, or parking lots is ruled out rent from genuine residential or commercial property. See Rev. Rul. 69-69, Rev. Rul. 80-287, and Rev. Rul. 80-298. Similarly, in Ocean Pines Association, Inc., the court held that the profits gotten from car park was not rent from real residential or commercial property and therefore the income was subject to UBIT.

Rent from "net revenues" leases. Where the rental income is based upon a percentage of the lessee's sales or revenues, the rental earnings will not exemption. See Treas. Reg. Section 1.512( b) -1( c)( 2 )( iii)( b).

Rent from "mixed leases." Rent from a lease where more than half of the overall lease is attributable to personal residential or commercial property will not be excluded from unassociated service gross income. Treas. Reg. Section 1.512( b) -1( c)( 2 )( iii)( a). Unrelated income from debt-financed residential or commercial property. Rent from residential or commercial property gotten with acquisition insolvency, as defined in IRC Section 514( c), unless considerably all of the use of the residential or commercial property is significantly associated to exempt functions. IRC Section 514( b). For example, in Gundersen Med. Found the court concluded that more than 85% of making use of the debt-financed residential or commercial property was significantly committed to the exempt purpose of the Foundation and for that reason the lease was not subject to UBIT.

Rent received from a regulated entity. As described in IRC Section 512( b)( 13 ), lease gotten from a regulated entity is includable in unrelated business income to the extent it reduces the net unassociated earnings of the controlled entity.

Rents gotten by organizations described in Sections 501( c)( 7 ), 501( c)( 9 ), and 501( c)( 17 ), to which special UBIT guidelines apply under IRC Section 512( a)( 3 ).

Issue signs or audit pointers

- Did the return indicate rental income and a mortgage?
Tour the facilities. Exist indications of locations or structures being leased? Identify which locations or structures are debt-financed.
Did taxpayer offer documents such as a rent/lease agreement revealing the income was from real residential or commercial property?
Did the files such as mortgage contract provided program if the real residential or commercial property that the EO received income from is financial obligation financed?
Did taxpayer provide files such as a service arrangement showing whether services were attended to the rental earnings received?