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Tax Issues for Real Estate Leasing By Tax-Exempt Organizations

By Michael J. Huft

The first article in this series (March 2009) examined the issues involved when a tax-exempt organization leases improved property to one or more parties. The primary issue examined in that article was whether or not the lease payments constituted, in whole or in part, payments for services provided to the tenants, rather than purely payments for the rental of real property.

Part Two, published last month, reviewed “UBIT,” the unrelated business income tax that the federal tax code imposes, computed at the corporate income tax rate, on the unrelated business taxable income (“UBTI”) of most exempt organizations. The article began a discussion of the issues involved when a tax-exempt organization owns a tract of vacant land that it wishes to develop and lease, so as to realize a stream of income from the land greater than would be realized by a simple sale or lease of the unimproved property. The article herein continues the discussion.

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