A church owns a parsonage, but the pastor does not use it as he own his own home. The church rents the parsonage to a tenant other than a minister or employee of the church. Will the church be responsible for paying income tax on these monies as Unrelated Business Income (filing a Form 990-T) even if the money is used to carry on the business of the church?
Whether the money is used for church purposes is irrelevant. IRS Publication 598 states:
"If an exempt organization regularly carries on a trade or business not substantially related to its exempt purpose, except that it provides funds to carry out that purpose, the organization is subject to tax on its income from that unrelated trade or business."
Fortunately, in the case of rental income from real property, such income is "excluded in computing unrelated business taxable income" (Publication 598). Caution: see content below regarding debt-financed property.
However, a second concern not addressed in the question must be raised: Will the parsonage lose its status as exempt from the real estate tax rolls of the local government? We have worked with churches in similar situations in multiple states. Our recommendation has been to communicate openly with the local authorities (typically an Assessor) as to the church's intentions. In several cases, because the use was temporary or rented to a missionary of the church during his furlough, the Assessor did not believe its use violated the statutory exemption from real estate taxes for church property.