Rental income is generally excluded from UBIT. If the church borrowed money to acquire its property and still owes that debt, the property is financed by debt. Rental income from externally financed real estate is subject to UBIT. An exception to this rule is that if 85% or more of the property is used for tax-exempt purposes, the rental income of the leveraged properties is not subject to UBIT. It is important for a church to consult with a CPA or qualified lawyer on these issues, which can be complicated if the church has borrowed money to buy its property. All states offer some form of property tax exemption for churches. Some States only exempt buildings that are used exclusively as places of worship. Renting all or part of your church building may cause the church to lose its property tax exemption for at least the part of its property that is no longer used for its service. This may be true even if the church leases its property to another charity, a tax-exempt organization, or even another church. The property tax exemption may apply exclusively to use for religious worship, and it is unlikely that the receipt of rental income will be considered an exclusive use of religious worship by the state. When the church incurs property taxes, it wants to ensure that the tenant is responsible for reimbursing some or all of the property tax. Because property tax exemptions for churches vary from state to state, it`s important to check with a local attorney to see how the leased portion of the property is handled and whether the church needs to inform local authorities about property tax.
First Congregational Church United Church of Christ has a large church building with a separate two-story educational wing that has eight separate classrooms and its own toilet. The Church used to run Sunday School for children in the education wing, but in recent years – before COVID – the Church has held a combined Sunday School class at The Fellowship Hall, working for the current demographics of the Church. As the Church considers her return to in-person worship, she is also considering what a different use of her construction space might look like and how the building can benefit Church services. After determining that the rental of its premises was well aligned with the Church`s missionary priorities and that Church staff were able to act as owners, the council appointed a small committee to consider leasing the educational wing to a long-term tenant. The act of a church may also include a reversal interest, the possibility of a reverter, a right of return, or some other type of restriction that gives the creator of the property the right to take ownership under certain conditions, such as. B as when the property is no longer used as a church. These types of provisions are common if the Church was originally granted to the property by the conference or a donor. Church property may also be subject to a special mortgage or an advance mortgage made years ago that does not need to be repaid unless the building is used for purposes other than a church.
Knowledge of these restrictions is essential for churches that plan to lease all or a significant portion of their building to a non-ecclesiastical organization. In some states, laws against restrictions on the transfer of ownership may affect the enforceability of these provisions. Before a church considers renting out its property, it should consider how its property can be used legally. Whether a church building can be leased to a tenant in whole or in part for a specific use may be affected by deed restrictions, restrictive agreements and zoning by-laws, or other municipal ordinances that affect whether certain businesses can operate in certain locations. While churches can be protected for religious purposes under the First Amendment, the Religious Land Use and Institutionalized Persons Act, and state laws, these protections are unlikely to extend to renting property to a tenant. Renting church space to a tenant can be a good source of income for the church, but there are several legal and tax issues that can affect the church`s financial performance. This does not mean that the church should not rent its space, but it does mean that the church should consider the cost of high-quality legal and tax advice to assess whether renting space is a good option for the church. Know how the church`s rental income is handled by federal and state tax authorities to avoid costly penalties! Some churches have restrictive agreements on their property that limit what neighborhood property can be used for. Normally, these restrictive covenants are included in the church`s property deed, but could be included in other registered documents.
Restrictive agreements can affect a church`s ability to rent the property for specific purposes, and may also provide that the church is responsible for any costs incurred by other owners to enforce the restrictions. It is also possible that restrictive covenants may no longer be valid. The lease must also meet insurance and indemnity requirements. The Church should consult with its insurance company about any requirements the insurance company may have for the Church`s lease. A tenant should be required to take out insurance and designate the church as an additional insured on a certificate of insurance that should be collected and maintained by the church. The tenant must agree to indemnify the church from all third party claims arising from the tenant`s use of the property. The lawyer can provide language appropriate to the circumstances. While most states exempt religious organizations from corporate tax, it`s important to know how your church`s rental income is treated in your state.
In addition, some states do not exempt churches from excise duty on gross income. Ecclesiastical institutions are generally exempt from federal income tax because they are 501(c)(3) organizations. But a church that operates a business or business that is regularly practiced and has nothing to do with its religious purpose may be subject to a tax on the income of that business. The tax is called an unrelated business income tax or UBIT. The Church`s need for revenue from business does not make it contiguous, nor does the Church`s use of revenues for religious purposes. Our parishioners give generously of their time and talent and often offer volunteer hours. What legal issues could First Congregational or other churches considering renting all or part of their space consider? This article discusses some of the most important legal and tax considerations. For more practical information, you can also read the United Church of Christ Church Building & Loan Fund`s Building Church Differently webinar on renting your church facilities. Knowing how your church`s rental income and tax status are managed can help you make good stewardship decisions regarding renting your church property to a tenant! A successful landlord-tenant relationship starts with mutual expectations, which should be included in a written lease. A lease is a legal document and must be written by an experienced lawyer hired by the Church for this purpose. The lawyer can advise the Church on his rights under federal and state law to impose certain provisions on his tenant.
Avoid uploading lease templates from the Internet – these leases may not take into account your state`s laws and may not take into account the unique circumstances of your church. A good lease deals with the usual contractual terms such as rent payment, lease termination and late payment, as well as how the costs of ancillary costs are assessed and shared. the use of common areas such as toilets and kitchens; the tenant`s share of the planned property tax; the tenant`s ability to adapt the space to their needs; and perhaps most importantly, any unique circumstance or need that the Church may have to ensure the success of the relationship. If the landlord-tenant relationship is to be terminated, the lawyer can advise the church on how to end the relationship in accordance with the terms of the contract. For more information about UBIT, see IRS Pub. No. 598. A local real estate lawyer can advise them on zoning, deed restrictions, and restrictive agreements. For more information about applicable state taxes, visit the website of your State Department of Taxation and CPA. .
Recent Comments