Church Renting Building: Unrelated Business Income Tax

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Question:

A church is considering renting itsbuilding to another church in the evenings and its second parsonage house to afamily. What are the tax ramifications of doing this, since this is not normalincome for a church?
Answer: There are both potential Unrelated Business Income Tax (UBIT)and local property tax concerns. First, tax exempt organizations generally donot need to report rental income as unrelated business income (UBI) unless it is financed with tax exempt debt instruments. "Rents from real property, including elevators and escalators, are excluded in computing unrelated business taxable income. Rents from personal property are not excluded" (IRS Publication 598).
However, depending on your local municipality assessor’soffice, the conversion of church use of a parsonage to rental property to anon-church staff member may cause the property to be placed back on the localreal estate tax roll. We recommend the church contact the local assessor’soffice to determine its risks of being put back on the tax roll.
Caution: churches that borrow to finance properties from which they receive rental income should read the section from Pub. 598 on“Income from Debt-Financed Property” which begins as follows:
"Investment income that would otherwise be excluded from an exempt organization's unrelated business taxable income must be included to the extent it is derived from debt-financed property. The amount of income included is proportionate to the debt on the property."