The rules regarding the identification of “dual-use” property rentals are murky and can be difficult to navigate. We’ve talked about these rules previously – in a different context. How about a refresher course on facility rentals?


Denali Christian College (DCC) is a private college exempt under Internal Revenue Code section 501(c)(3). DCC leases its basketball arena to a for-profit entertainment business for a concert sponsored by a for-profit promotional company.  In addition to use of the arena, the DCC agrees to provide utilities and security services and will operate the concession stands for the event.  The concert does not contribute to the educational activities of the College.  Due to the substantial services provides by the College, the rental income from this arrangement results in unrelated business income for the College.


From the 2014 ACT Report:

Facility Rental; Dual Use Property

Under Section 1.512(c)(2)(ii) of the Income Tax Regulations, all rents from real property are excluded from the calculation of taxable unrelated business income and all rents from personal property leased with real property are excluded from an organization’s unrelated business income if the rents attributed to the personal property are incidental to the total rents received or accrued under the lease.  For this purpose, the personal property rents are “incidental” to the total rents if the rents do not exceed 10 percent of the total rents.  If more than 50 percent of the total rents are attributable to the personal property or the determination of rents depend in whole or in part on the income or profits derived by any person from the property leased, other than an amount based on a fixed percentage or percentage of the gross receipts or sales, then no portion of the rental income is excluded from unrelated business income.

Rev. Rul. 80-297, 1980-2 CB 196, situation 1, provides that a school operating a tennis club through its own employees, who performed substantial services for the participants in the club, could not exclude the income received as rent from real property.

Situation 2 of Rev. Rul. 80-297 describes a school that provides its tennis facilities available to an unrelated individual for ten weeks at a fixed fee which does not depend, in whole or in part, on the income or profits from the leased property. In situation 2, the school provided the leased facilities without the provision of any services. Situation 2 provides that, unlike Situation 1, the income received from the leased property was treated as rents from real property under Section 512(b)(3) of the Code and was excludable from unrelated business income.

Rev. Rul. 80-298, 1980-2 CB 197, provides that a university leasing its stadium to a professional football team and furnishing grounds and playing field maintenance, dressing room linens, and stadium dressing rooms was furnishing substantial services for the convenience of the lessee. The provision of such substantial services for the convenience of the lessee go beyond those usually rendered in connection with the rental of space for occupancy only. Rev. 80-298 concludes that the income derived from the university’s leasing of its stadium is not excluded from unrelated business taxable income as rent from real property under Section 512(b)(3) of the Code.

Rev. Rul. 78-98, 1978-1 C.B. 167, describes an exempt school which operates a ski facility for use in its physical education program and also for use, to a substantial degree, for recreational purposes by students attending the school and members of the public who are required to pay slope and ski lift fees comparable to nearby commercial facilities. The recreational use of the facility by students is substantially related to the school’s exempt purposes and the income derived from the student’s use of the facility is not from unrelated trade or business under I.R.C. § 513. However, the income from use of the facility by the public is from an unrelated trade or business.

Section 1.512(a)-1(c) of the Income Tax Regulations provides that where facilities are used both to carry on exempt activities and to conduct unrelated trade or business activities, expenses, depreciation and similar items attributable to such facilities . . . shall be allocated between the two uses on a reasonable basis.  It further provides that the portion of any such item so allocated to the unrelated trade or business is proximately and primarily related to that business activity, and shall be allowable as a deduction in computing unrelated business taxable income in the manner and to the extent permitted by Section 162, Section 167, or other relevant provisions of the Code.

Section 1.513-1(d)(4)(iii) of the Income Tax Regulations provides that certain dual use assets and facilities may be employed in both related and unrelated businesses.  The gross income from the use of the asset in an unrelated business is unrelated business income.

**Note that the IRS has included the following in it’s 2015-2016 Priority Guidance Plan (Exempt Organizations):

5. Guidance under §512 regarding methods of allocating expenses relating to dual use facilities.

Bottom Line

We continually receive questions about “dual-use” rentals of college facilities. The identification of these activities can be difficult – and the allocation of dual-use expenses is another story!  Applying these rules to your specific situations can be daunting. It makes sense to touch base with a qualified tax advisor on these items. He or she will be able to help you navigate which ones may affect your school.

Specific questions? Email Dave Moja.

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.