How Can a 501(c)3 Rent Property?

By Heather Frances J.D.

A 501(c)(3) nonprofit can generally rent property from someone else to house its operations; it can also rent its own property out to other organizations. For example, a church could rent out its space during the week to another organization that meets during the week. This can have tax consequences but does not necessarily disqualify a nonprofit from its 501(c)(3) tax status.

Income Taxes

Exempt nonprofits generally do not have to pay taxes on their incomes, but some types of income are taxable. Depending on the circumstances, the rental income might be considered unrelated business income, a taxable income category for nonprofits. Factors that determine whether the income is taxable include whether the tenant's activities are related to the nonprofit's purpose, how the property is financed, and whether the lease terms are based on the tenant's profit or the nonprofit provides resources or staff time to help the tenant.

Property Taxes

State laws determine whether the nonprofit's real estate is taxable. Though states may make a nonprofit's real estate tax-exempt as long as the nonprofit uses it for its own purposes, state laws may remove exemptions if a nonprofit begins renting out its property to other organizations. Since these exemptions are location- and fact-specific, nonprofits may want to check with a tax or legal professional before making rental decisions.

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References

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Washington State Rules for Nonprofit Organizations

Rules for nonprofit organizations in Washington state are similar to rules for other business organizations. Nonprofits are required to register with the Department of Revenue and comply with certain tax rules. Tax exemptions are available in some circumstances from the Department of Revenue. Nonprofits that intend to solicit charitable donations must register with the Charities Program of the Secretary of State. Nonprofits that incorporate must comply with the Washington Nonprofit Corporation Act.

Can a 501(c)(3) Make a Profit?

A 501(c)(3) organization is a nonprofit that has made a special election with the Internal Revenue Service to be treated as exempt from federal income taxes. The formation and operation of these organizations is governed by both state and federal laws, which require that the business further a specific charitable, scientific, educational or religious purpose. This sets 501(c)(3) organizations apart from for-profit ventures, which are formed for the purpose of generating profits for their owners. Although nonprofits are not prohibited from generating profit from business activities, state and federal laws limit how these profits may be used.

Regulations for 501(c)(3) Donations

One of the main benefits of creating a 501(c)(3) nonprofit organization is the ability to accept tax-deductible donations. The IRS designation 501(c)(3) indicates that the nonprofit is exempt from federal tax. However, in order to stay exempt and ensure donors can deduct their donations, it is essential to follow the IRS rules for written disclosures, record-keeping and annual reports.

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