I am a member of a Church Vestry in Virginia. The church is a 501(c)(3), and it owns a piece of retail property across the street from the m...

Question

I am a member of a Church Vestry in Virginia. The church is a 501(c)(3), and it owns a piece of retail property across the street from the main sanctuary. If we lease the retail property to generate income, are we subject to an unrelated business income tax or would we fall within the exception for rental income. Our rental rate would not be tied to the income/profits of the tenant businesses.

Answer

In this instance, you should create a separate corporation apart from the tax exempt organization. You run the risk of the IRS determining that the profit you generate from the commercial enterprise represents a "for-profit" engagement, and losing tax exempt status for the entire 501(c)(3) organization. Generally, churches are fairly bullet proof, but commercial real-estate is rarely ever a non-profit mission. Ass such, my recommendation -- create a separate corporation that handles for-profit aspects of the business, and leave the church and church activities as tax-exempt.

If this is not clear, or you would like to discuss further, please give me a ring at 703-402-2723.

v/r -

Sean R. Hanover, Esq.

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