July 11, 2016

Renting a Church Parsonage: Threat to Tax Exempt Status

Question:

A church renting its parsonage to a non-staff member:
1.) Must a special account be established for funds received from rental of a church parsonage?
2.) Can these funds be used for church expenses not related to the property without affecting the church's tax-exempt status?

Answer:

We will address some significant concerns with the actions of the church; but first, in order to answer the questions above, the subject of Unrelated Business Income Tax (UBIT) must be consideredAccording to IRS Publication 598, "Rents from real property ... are excluded in computing unrelated business taxable income." The IRS cites exceptions to this rule. One exception is if the rental is debt-financed, the organization may owe UBIT. 

Now to answer the questions submitted:

1.) The church does not need to establish a separate account. It will not owe UBIT unless specialized debt-financing is employed which is beyond the scope of this blog post.  
2.) The church tax-exempt status will not affected by the use of the rental income for expenses not related to the property. HOWEVER, the church may lose its real estate tax exemption for the property because it is not used for a exempt purpose. We recommend the church contact the local tax assessor to determine whether temporary housing of non-church staff may avoid reclassification of the exempt status of the property.


See a past blog post for more information:
http://ministrycpa.blogspot.com/2012/11/church-renting-building-unrelated.html

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