Should Your Church Rent Out Its Property?
By: Kyle McCutcheon
Church leaders often explore creative ways to increase and steward resources to support their church’s ministry activities. One of the common ways that churches bring in additional income is through renting out their property to others. If done right, this could be a viable option for a church. However, there are serious legal and practical issues to consider before doing so. One of those legal issues to consider is whether renting out your church-owned property could jeopardize your church’s tax-exempt status.
Under Section 501(c)(3) of the Internal Revenue Code, churches are automatically considered tax-exempt organizations. This status exempts churches from paying federal income tax on their earnings, donations, and other activities related to their exempt purposes. However, when a church rents out its property, that income could be deemed taxable unrelated business income (UBI) by the IRS. Too much unrelated business income can jeopardize a church’s automatic tax-exempt status.
Generally, the IRS defines UBI as income derived from a trade or business that is regularly carried on and that is not substantially related to the church’s tax-exempt purpose. The IRS has also ruled that rent generated from debt-financed church property is generally subject to UBI. Importantly, however, the IRS laid out an exception to this rule in that rent generated from debt-financed property may avoid the UBI classification if the individual or organization renting the property is using the property consistent with the exempt purposes of the church. For example, a church may be able to rent its property to a faith-based school without incurring UBI as both the church and the schools exempt purposes include raising up children in the instruction of the Lord. Likewise, renting to another church is not likely to trigger UBI.
So, it is important for churches to analyze whether renting its property will subject it to UBI. If so, UBI should not become a substantial part of the church’s overall revenue. Though the IRS does not expressly define what constitutes “substantial,” a conversative approach is to limited UBI to 10-15% of overall revenue to ensure the IRS does not revoke your church’s tax-exempt status.
There are many other issues to consider before a church decides to rent its property. Every situation is unique so it is always best to seek the advice of a trusted attorney. If your church or non-profit organization needs assistance sorting through the legal and practical implications of whether or not to rent out your property, contact Kyle McCutcheon at Provident Law. Kyle is an Arizona native with many years of experience counseling churches and non-profits around the country on a wide-array of issues.
Kyle McCutcheon is an Attorney at Provident Law. His practice areas include business, real estate, and estate planning as well as advising church and nonprofit tax-exempt organizations. McCutcheon is licensed to practice law in Arizona and Missouri, and he can be reached at kyle.mccutcheon@ProvidentLawyers.com or at 480-388-3343.