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Is Rental Income Taxable?

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“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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