Church-Owned Rental Housing and UBIT: What Administrators Should Know

A practical guide for churches that own and rent residential property.

Churches sometimes own homes or other residential property. From a tax perspective, the first question is usually whether rental income from that property creates unrelated business income tax, commonly called UBIT.

1. The basic rule: residential rent is usually not UBIT

In general, rent from real property is excluded from unrelated business taxable income.

That means a church that owns a home and receives rent for use of that home is often in a favorable position under IRS rules.

The IRS explains this rule in its guidance on rent exclusion from UBIT for churches .

2. The rental amount is usually not the issue

For UBIT purposes, the key issue is whether the church is receiving rent from real property or operating a service-based activity.

A simple residential lease is different than running a hotel.

3. Debt on the property is a major red flag

If the property has a mortgage, rental income can become taxable. Churches should review mortgaged rental property carefully before assuming the rental income is fully excluded.

A practical way to review church-owned housing

Before treating residential rental income as excluded from UBIT, administrators should ask:

• Is this rent from real property?
• Is the property owned free and clear?
• Are only ordinary landlord services being provided?
• Is there a written lease or occupancy agreement?
• Is the arrangement documented as part of the church’s records?

If the answer to those questions is yes, the arrangement is usually much easier to defend.

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This material is for informational purposes and reflects general IRS guidance on rental income from real property and unrelated business income. Churches should consult a qualified professional before relying on the rental income exclusion.