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Tax Issues for Real Estate Leasing By Tax-Exempt Organizations
It is not uncommon for tax-exempt organizations to want to lease real estate they own to residential or commercial tenants, whether the real estate consists of empty land or existing buildings. Such rentals often provide a good source of revenue for the organization, as well as a means of maintaining in use property that the organization may wish to hold for long-term development for its own uses, but is temporarily not needed. In other cases, it involves property that may never be used by the organization, but the organization believes that leasing the property will produce greater income, or at least a steady stream of income over a longer period of time, than would be available by selling the property outright.
In these regards, tax-exempt organizations are no different from for-profit businesses that need to find a use for property that may be temporarily or permanently not needed for the business's operations. There are major differences, however, in the consequences. Although tax-exempt entities do not ordinarily pay tax on their income, the federal tax code does tax the income of tax-exempt organizations that is derived from commercial activities. Although an organization is permitted to engage in some degree of commercial activity (and pay the tax on the income derived from such activity), if the taxable income from the activity constitutes too large a portion of the organization's overall income, it will jeopardize the organization's exemption.
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