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Is Rental Income Taxable?

house with lawn

“If we rent out our church building, is that taxable income?”

First, it’s important to determine whether the rental activity itself is substantially related to your tax-exempt purpose and mission. If it’s related, the income is tax-exempt.

If the rental activity is not related to your mission, then the rental income would be taxable in these situations:

  1. If more than 50% of the rent is for the use of personal property (vehicles, furniture, and equipment for example), all of the income is taxable, even the real property portion. If more than 10%, but less than 50%, is for personal property, then a portion of the rent will be taxable.
  2. If the property has a mortgage and the lessee is renting out more than 15% of the square footage, then the income is taxable because it is debt-financed income.
  3. If personal services are provided to the lessee, those are always taxable.

If the income is taxable and gross revenue is over $1,000, your church will need to file IRS Form 990-T and the related state form.  

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