Determining when to include rental income in your unrelated business income (UBI) tax calculation can be challenging; however, it is a commonly conducted non-profit organization activity. We created a beginner’s guide checklist to help you get started.
There are two common types of rental income we see among our non-profit clients:
Real Property:
- Providing low-income housing to patients in addiction treatment programs.
- Renting out spaces for special events such as conferences, formal meetings and special gatherings.
- Leasing portions of excess building space to other organizations, including unrelated for-profit and non-profit organizations.
- Leasing space with services such as reception, janitorial services, and other services for the convenience of the lessee.
- Leasing space with personal property.
Personal Property/Services:
- Leasing personal property such as cubicles and other equipment.
- Leasing personal property with or without services.
In general, rental income derived from passive activity is excludable from unrelated business income reporting. However, there are specific types of rental income considered taxable by the Internal Revenue Service (IRS). When determining if rental income is UBI, consider several factors including answers to the following questions: what type of property is it (real or personal property), is it substantially related to the organization’s mission, what is the structure of the contract, and is the property debt-free?
UBI can be a difficult tax area to navigate for non-profits. Below is a beginner’s guide intended for high-level determination of whether rental income is subject to unrelated business income tax reporting for tax-exempt entities under Internal Revenue Code Section 501(c)(3).
Taxability of rental income is fact-and-circumstance driven, so if you have questions, feel free to contact your local Blue & Co. tax advisor for a more in-depth analysis of risk for UBI.
Rental Income Scenarios
| Debt-Free Real Property Rental Income | Generally | Generally |
| Rental income from real property related to occasionally renting space/rooms for meetings, conferences, special gatherings to unrelated entities. | X | |
| Rental income from real property related to renting retail space to an unrelated entity. | X | |
| Rental income from real property related to renting housing to non-patients or the general public which is not substantially related to the organization’s exempt mission. | X | |
| Rental income from real property for low-income housing to patients of the organization. | X | |
| Organization is operating the leasing of the space as a trade or business, and it is regularly carried on. ** Most likely included as UBI reporting unless this is the organization’s mission and tax-exempt purpose.
| ** | |
| Debt-Financed Real Property Rental Income | Generally | Generally |
| Rental income from real property for continuous use of office space to an unrelated entity | X | |
| Rental income from real property used 85% or more on exempt functions related to occasionally renting space/rooms for meetings, conferences, special gatherings to unrelated entities. | X | |
| Rental income from real property used 85% or more on exempt functions related to renting space to an unrelated entity with a similar mission. | X | |
| Rental income from real property used less than 85% on exempt functions, for space to an unrelated entity with a similar mission. | X | |
| Rental income from real property used 85% or more on exempt functions related to renting retail space to an unrelated entity. | X | |
| Rental income from real property used less than 85% on exempt functions related to renting retail space to an unrelated entity. | X | |
| Rental Income Based on Lessee Income | Generally | Generally |
| Rental income from real property based on a percentage of gross sales or gross receipts related to renting space to an unrelated entity. | X | |
| Rental income from real property based on income or profit earned by the lessee related to renting space to an unrelated entity.
| X | |
| Personal Property Rental Income | Generally | Generally |
| Rental income from real property with 10% or less attributed (incidental amount) to personal property. | X | |
| Rental income from real property with more than 10%, but less than 50% attributed (incidental amount) to personal property. **partially exclude to the extent the income is attributable to real property. | ** | ** |
| Rental income from real property with more than 50% attributed to personal property. | X | |
| Rental Income from personal property. | X | |
| Rentals with Service Income | Generally | Generally |
| Income from substantial services provided for the convenience of the lessee as part of a real property rental lease.* *leases with services not separately stated can cause the rental income from real property to be UBI in addition to the services. | X | |
| Income from utilities and janitorial services provided as part of a real property rental lease. | X | |
| Income from services provided with personal property rental lease. | X |
Originally Posted on: Aug 15, 2018
Updated on: Sep 28, 2023
