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Tax Issues for Real Estate Leasing by Tax-Exempt Organizations

By Michael J. Huft

The first three articles in this series (Commercial Leasing Law & Strategy, March, August, and September 2009) examined the issues involved when a tax-exempt organization leases improved property to one or more parties, or develops vacant land for lease or sale to third parties. The primary issues examined in those articles were how to structure the lease payments or the relationship with the developer of the land to avoid having payments to the tax-exempt organization subject to tax for engaging in a business unrelated to the organization's exempt purpose. In these earlier articles, a basic assumption was that the tax-exempt organization did not carry or incur any debt with respect to the real estate in question.

This article, the last in the series, examines the issues involved when a tax-exempt organization carries or incurs debt with respect to real estate from, or to which, it receives income unrelated to its exempt purposes. This is an important consideration, because the presence of such debt may negate any advantage obtained by the careful structuring of the transactions, as discussed in the earlier articles, with respect to avoiding tax on unrelated business income.

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