Income from Rental of Church Facilities…Avoiding Traps for the Unwary

by | Mar 20, 2018

Congregations in the Diocese of Washington and elsewhere increasingly supplement pledge and investment earnings with income from making church facilities available at a charge to outside groups.  These arrangements vary from the use of facilities for single events to ongoing use of church facilities by other congregations, schools and other groups.

Several areas deserve attention concerning arrangements for ongoing uses of parish facilities—

  • Zoning. It is wise to be familiar with the zoning classification for your property to avoid uses that are beyond the scope of uses that are authorized in the zone. Sometimes it is possible to obtain a Special Exception for uses outside the applicable zoning category.

  • Property Tax. To varying degrees within the Diocese, local property tax assessors have demonstrated increasing interest in obtaining partial assessments of property taxes based on facility rentals. The volume of outside group space usage, the nature of the groups using church property and the structure of the transactions all are relevant to determining the degree of vulnerability to receiving a partial assessment of property taxes.

  • Unrelated Business Income Tax (UBIT). Generally, rental income will be exempt from federal unrelated business income tax. However, if there is outstanding indebtedness that was used to fund the acquisition or improvement of the facilities being rented, this exemption may not apply—and the church may be required to file a tax return with the IRS Form 990-T and remit UBIT.

It is important to carefully document arrangements for the use of church facilities. Some complex arrangements for ongoing use of church property, such as by a school, may require a leasing relationship.  However, the greater number of uses may be more flexibly documented with a facilities use agreement. In addition to key terms such as a clear description of the space, the term of the arrangement, and the amount to be paid for the use, there are other terms that should be addressed. Some of these include:

  • Policies concerning use of alcohol;

  • Termination provisions that permit the church to conclude the arrangement quickly and with certainty if necessary;

  • Insurance provisions protecting the church; and

  • Indemnification provisions under which users are required to hold the church harmless from claims and expenses arising out of the use of the facilities.

Members of your Diocesan Team are here to assist you in assessing issues, reducing risks and documenting arrangements with space users.

Questions? Email Paul Cooney