commit 74c7207e5aaa3f195656d47de8406d3405cf4b89 Author: tanyahernsheim Date: Fri Oct 31 14:29:35 2025 +0800 Add Exclusion of Rent from Real Residential Or Commercial Property From Unrelated Business Taxable Income diff --git a/Exclusion-of-Rent-from-Real-Residential-Or-Commercial-Property-From-Unrelated-Business-Taxable-Income.md b/Exclusion-of-Rent-from-Real-Residential-Or-Commercial-Property-From-Unrelated-Business-Taxable-Income.md new file mode 100644 index 0000000..339ecfc --- /dev/null +++ b/Exclusion-of-Rent-from-Real-Residential-Or-Commercial-Property-From-Unrelated-Business-Taxable-Income.md @@ -0,0 +1,169 @@ +
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1. Exclusion of lease from real residential or commercial property from unrelated company taxable earnings
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[Exclusion](https://rrbuildtech.com) of rent from genuine residential or commercial property from unassociated organization taxable earnings
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More In File
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- Individuals. +- Businesses and self-employed. +- Charities and nonprofits - Exempt company types. +- Lifecycle of an exempt company. +- Annual filing and forms. +- Charitable contributions. +- Search for charities. +- Education sessions
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Rental earnings from real residential or commercial property received by exempt companies is normally excluded from unassociated organization gross income (UBTI). However, lease may not fall under the exemption in various scenarios, such as when substantial personal services are offered to lessees, if more than 50% of the lease is for using individual residential or commercial property, if the residential or commercial property is debt-financed income or rented to a regulated entity, or if the company is exempt under Sections 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 particular 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](https://realestatemart.com.gh) 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) homeowners' association's operation of car park was not rent from genuine residential or commercial property left out from unrelated business gross income by Section 512( b)( 3 ). +- Gundersen Med. Found. v. United States, 536 F. Supp. 556 (W.D. Wis. 1982) A medical educational and research study structure exempt under area 501( c)( 3) rented some of its buildings, which were subject to a mortgage, to a private non-exempt center. The court found that the rental earnings from debt-financed residential or commercial property was not unassociated business income, under Section 514( b)( 1 )( A)( ii), because the clinic's use of the rented genuine (and individual) residential or commercial property in providing medical services and training medical trainees was significantly related to the structure's exempt functions. +- Rev. Rul. 69-69, 1969-1 C.B. 159 The leasing of homes and the operation of a dining hall by an exempt organization constitute unrelated trades or services where inhabiting the apartments is not primarily for the benefit of its members. +- Rev. Rul. 80-297, 1980-2 C.B. 196, amplifying Rev. Rul. 76-402, 1976-2 C.B. 177, holds that an exempt school that uses its tennis centers for 10 weeks in the summer as a public tennis club run by employees of the school's athletic department is taken part in unassociated trade or service and the earnings earned is not excludable from unassociated organization taxable earnings as rent from genuine residential or commercial property. If, however, the school rents the tennis facilities for a repaired charge to an unrelated person who operates a tennis club for the general public, the school is still participated in unrelated trade or business, however the lease earnings is omitted from unrelated company gross income as rent from real residential or commercial property. +- Rev. Rul. 80-298, 1980-2 C.B. 197 holds that earnings from the lease of a football stadium by a tax-exempt university to an expert football group is not lease from genuine residential or commercial property left out under Section 512( b)( 3) due to the fact that the university supplied substantial services (which did not make up customary services) for the benefit of the group. +1989-B EO CPE Text PDF - Rents from Real Residential Or [Commercial Property](https://topapartmentsre.com) - Rendering Services
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Analysis
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According to IRC Section 512( b)( 3 ), leas from real residential or commercial property are excluded from unrelated company taxable earnings. Real residential or commercial property is land and any buildings or other structures permanently connected to land, and consists of any residential or commercial property explained in IRC Section 1245( a)( 3 )( C). However, there are several situations in which the exemption does not use. These might include:
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Rent, if the leasing of facilities includes the provision of services, such as food and beverage sales. Rental payments for using rooms or space where services are likewise [rendered](https://www.sharplanding.com) to the residents does not constitute lease from genuine residential or commercial property. Services are thought about rendered to residents if they are mainly for their convenience. Those services usually or customarily 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 instance, the supplying of maid service makes up service to the resident, whereas the [furnishing](https://cartagenafincaraiz.com) of heat and light, the cleansing of public areas, and the collection of garbage, are not thought about as services rendered to the resident. Rental earnings from hotel rooms, storage units, or parking area is ruled out lease 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 revenue received from parking lots was not lease from real residential or [commercial property](https://www.roomsandhouses.nl) and therefore the income was subject to UBIT.
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Rent from "net profits" leases. Where the rental income is based on a portion of the lessee's sales or revenues, the rental earnings will not receive 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 50 percent of the total lease is [attributable](https://royalestatesdxb.com) to personal residential or commercial property will not be omitted from unrelated company taxable earnings. Treas. Reg. Section 1.512( b) -1( c)( 2 )( iii)( a). +Unrelated income from debt-financed residential or commercial property. Rent from residential or commercial property gotten with acquisition insolvency, as specified in IRC Section 514( c), unless substantially all of making use of the residential or commercial property is substantially related to exempt functions. IRC Section 514( b). For example, in Gundersen Med. Found the court concluded that more than 85% of using the debt-financed residential or commercial property was significantly devoted to the exempt function of the Foundation and for that reason the lease was not subject to UBIT.
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Rent received from a regulated entity. As described in IRC Section 512( b)( 13 ), rent received from a regulated entity is includable in unassociated company earnings to the degree it reduces the net unassociated earnings of the regulated entity.
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Rents received by companies described in Sections 501( c)( 7 ), 501( c)( 9 ), and 501( c)( 17 ), to which special UBIT rules use under IRC Section 512( a)( 3 ).
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Issue indications or audit pointers
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- Did the return indicate rental earnings and a mortgage? +- Tour the facilities. Are there indications of areas or structures being rented? Identify which areas or buildings are debt-financed. +- Did taxpayer provide documentation such as a rent/lease agreement revealing the earnings was from genuine residential or commercial property? +- Did the documents such as mortgage contract provided program if the genuine residential or commercial property that the EO got earnings from is debt financed? +- Did taxpayer offer documents such as a service agreement showing whether services were offered the rental income received?
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