May 12, 2017

Gain on Sale of Land by Church

Question:

A church wishes to sell a five acre lot of land. The church obtained the property 15 years ago and had the plan of building on the property, but it since abandoned those plans. If it sells the property will it be taxed on the gain?

Answer:

This gain will not be taxed since the church did not hold the property primarily for investment or as inventory in the sense that a real estate developer might purchase and improve property for eventual sale. The 26 U.S. Code § 512 - Unrelated business taxable income lays out what income can be taxed to a tax-exempt organization. According to 26 U.S. Code § 512 - Unrelated business taxable income, "There shall be excluded all gains or losses from the sale, exchange, or other disposition of property other than—

(A) 
stock in trade or other property of a kind which would properly be includible in inventory if on hand at the close of the taxable year, or
(B) 
property held primarily for sale to customers in the ordinary course of the trade or business."

The church will not likely owe UBIT unless specialized debt-financing is employed, a topic which is beyond the scope of this blog post. See Internal Revenue Code Section 514 for information on debt-financed income. 

For instruction from past blogs see the links below:

http://ministrycpa.blogspot.com/2016/07/renting-church-parsonage-threat-to-tax.html

http://ministrycpa.blogspot.com/2012/11/church-renting-building-unrelated.html