From 6b14cf52c1a2965a8303e5edd7b32c2ce76e2b98 Mon Sep 17 00:00:00 2001 From: Addie Deyoung Date: Fri, 31 Oct 2025 22:52:26 +0000 Subject: [PATCH] Update 'Exclusion of Rent from Real Residential Or Commercial Property From Unrelated Business Gross Income' --- ...ty-From-Unrelated-Business-Gross-Income.md | 169 ++++++++++++++++++ 1 file changed, 169 insertions(+) create mode 100644 Exclusion-of-Rent-from-Real-Residential-Or-Commercial-Property-From-Unrelated-Business-Gross-Income.md diff --git a/Exclusion-of-Rent-from-Real-Residential-Or-Commercial-Property-From-Unrelated-Business-Gross-Income.md b/Exclusion-of-Rent-from-Real-Residential-Or-Commercial-Property-From-Unrelated-Business-Gross-Income.md new file mode 100644 index 0000000..7b83d1c --- /dev/null +++ b/Exclusion-of-Rent-from-Real-Residential-Or-Commercial-Property-From-Unrelated-Business-Gross-Income.md @@ -0,0 +1,169 @@ +
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1. Exclusion of lease from genuine residential or commercial property from unassociated company gross income
+
Exclusion of rent from real residential or commercial property from unassociated organization taxable income
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Rental income from real residential or commercial property received by exempt companies is typically excluded from unrelated company gross income (UBTI). However, rent may not fall under the exemption in different circumstances, such as when substantial personal services are offered to lessees, if more than 50% of the lease is for the usage of personal residential or commercial property, if the residential or commercial property is debt-financed earnings or rented to a controlled entity, or if the organization is exempt under [Sections](https://www.realty.solitudestandard.com) 501( c)( 7 ), 501( c)( 9) or IRC 501( c)( 17 ).
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IRC Section and Treas. Regulation
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- IRC Section 512( b)( 3) Rents from genuine residential or commercial property omitted from UBI. +- IRC Section 512( b)( 13) Special rules for specific amounts gotten from regulated entities. +- IRC Section 514( b)( 1) Definition of debt-financed residential or commercial property. +- Treas. Reg. Section 1.512( b) -1( c) Rent adjustment
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Resources (court cases, Chief Counsel Advice, Revenue Rulings, internal resources)
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- Ocean Pines Ass 'n v. Comm' r, 135 T.C. 276 (2010) The Tax Court held that profits gotten by a 501( c)( 4) house owners' association's operation of parking area was not lease from real residential or commercial property left out from unrelated organization taxable earnings by Section 512( b)( 3 ). +[- Gundersen](https://tracyhuteam.ca) Med. Found. v. United States, 536 F. Supp. 556 (W.D. Wis. 1982) A medical instructional and research foundation exempt under area 501( c)( 3) rented a few of its structures, which were subject to a mortgage, to a personal non-exempt clinic. The court discovered that the rental earnings from debt-financed [residential](https://betweded.com) or commercial property was not unrelated company earnings, under Section 514( b)( 1 )( A)( ii), since the center's usage of the leased real (and individual) residential or commercial property in supplying medical services and training medical trainees was substantially related to the foundation's exempt purposes. +- Rev. Rul. 69-69, 1969-1 C.B. 159 The leasing of apartments and the operation of a dining hall by an exempt organization constitute unrelated trades or organizations where [occupying](https://dnd.mn) the homes is not primarily for the convenience of its members. +- Rev. Rul. 80-297, 1980-2 C.B. 196, enhancing Rev. Rul. 76-402, 1976-2 C.B. 177, holds that an exempt school that uses its tennis facilities for ten weeks in the summer season as a public tennis club operated by workers of the school's athletic department is taken part in unassociated trade or service and the earnings earned is not excludable from unassociated business taxable income as lease from real residential or commercial property. If, however, the school rents the tennis facilities for a fixed fee to an unassociated person who operates a tennis club for the public, the school is still participated in trade or business, however the lease income is left out from unassociated service gross income as lease from genuine residential or commercial property. +- Rev. Rul. 80-298, 1980-2 C.B. 197 holds that income from the lease of a football arena by a tax-exempt university to a professional football group is not rent from genuine residential or commercial property omitted under Section 512( b)( 3) due to the fact that the university provided substantial services (which did not constitute traditional services) for the convenience of the group. +1989-B EO CPE Text PDF - Rents from Real Residential Or Commercial Property - Rendering Services
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Analysis
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According to IRC Section 512( b)( 3 ), rents from genuine residential or commercial property are excluded from unrelated service taxable income. Real residential or [commercial property](https://www.proyectobienes.net) is land and any buildings or other structures permanently attached to land, and includes any residential or commercial property explained in IRC Section 1245( a)( 3 )( C). However, there are several situations in which the exemption does not apply. These might consist of:
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Rent, if the leasing of centers includes the provision of services, such as food and beverage sales. Rental payments for the use of rooms or space where services are also rendered to the residents does not make up lease from real residential or commercial property. Services are thought about rendered to residents if they are primarily for their [benefit](https://www.zambianhome.com). Those services typically or usually rendered in connection with the rental are not thought about rendered to residents. See Treas. Reg. Section 1.512( b) -1( c)( 5 ),
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For example, the supplying of maid service constitutes service to the occupant, whereas the furnishing of heat and light, the cleaning of public areas, and the collection of garbage, are not thought about as services rendered to the occupant. Rental income from hotel spaces, storage systems, or car park is ruled out rent from real residential or commercial property. See Rev. Rul. 69-69, Rev. Rul. 80-287, and Rev. Rul. 80-298. Similarly, in Ocean Pines Association, Inc., the court held that the income gotten from parking lots was not rent from genuine residential or commercial property and for that reason the earnings went through UBIT.
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Rent from "net earnings" leases. Where the rental income is based on a percentage of the lessee's sales or profits, the rental income will not get approved for exemption. See Treas. Reg. Section 1.512( b) -1( c)( 2 )( iii)( b).
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Rent from "mixed leases." Rent from a lease where more than half of the total lease is attributable to individual residential or commercial property will not be omitted from unassociated company gross income. Treas. Reg. Section 1.512( b) -1( c)( 2 )( iii)( a). +Unrelated earnings from debt-financed residential or commercial property. Rent from residential or commercial property gotten with acquisition indebtedness, as defined in IRC Section 514( c), unless significantly all of making use of the residential or commercial property is significantly related to exempt [functions](https://indiajameen.ai). IRC Section 514( b). For instance, in Gundersen Med. Found the court concluded that more than 85% of the use of the debt-financed residential or commercial property was [considerably committed](https://bytyrohatec.cz) to the exempt function of the Foundation and for that reason the rent was exempt to UBIT.
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Rent got from a controlled entity. As described in IRC Section 512( b)( 13 ), lease gotten from a regulated entity is includable in unassociated business earnings to the extent it lowers the net unrelated income of the regulated entity.
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Rents gotten by companies explained in Sections 501( c)( 7 ), 501( c)( 9 ), and 501( c)( 17 ), to which unique UBIT guidelines apply under IRC Section 512( a)( 3 ).
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Issue indications or audit suggestions
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- Did the return suggest rental earnings and a mortgage? +- Tour the centers. Are there indications of areas or structures being rented out? Identify which areas or structures are debt-financed. +- Did taxpayer offer paperwork such as a rent/lease contract revealing the income was from genuine residential or commercial property? +- Did the documents such as mortgage contract offered show if the genuine residential or commercial property that the EO received income from is debt financed? +- Did taxpayer supply documents such as a service arrangement revealing whether services were offered the rental earnings received?
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