Rentals of real property are generally excluded from unrelated business income.  But what does it mean to have a “dual-use” rental?


Saltwater Christian College (SCC) is a private college exempt under Internal Revenue Code section 501(c)(3) and 170(b)(1)(A)(ii).  They are required to file Form 990 annually.

SCC is planning to lease one floor of a four-story office building they own to an architecture firm.  They call us to ask whether the lease income would constitute unrelated business income.

We begin by telling them that real property rentals are excluded from unrelated business income under I.R.C. Section 512(b)(3)(A)(i).  Unless the real property is subject to acquisition debt.  Unless you are a “qualified organization” – which is a school or related foundation.

“So,” says the SCC CFO, “since we are school, we cannot have unrelated business income from rentals of office space, right?”

“Not so fast,” we say.  “If you provide certain services, then the rental could be deemed ‘dual-use property’ and thus, taxable.”

“Okay, what are those services?” asks the CFO.

“Generally, it comes down to whether the ‘services’ are rendered for the convenience of the occupant or for occupancy only.  Now we know that can be about as clear as mud, but maid service, set up of equipment, running a Zamboni on a rented ice surface, and tasks like that are usually going to create a ‘dual-use’ situation.”



From Treas. Reg. 1.512(b)-1(c)(5):

Rendering of services. For purposes of this paragraph, payments for the use or occupancy of rooms and other space where services are also rendered to the occupant, such as for the use or occupancy of rooms or other quarters in hotels, boarding houses, or apartment houses furnishing hotel services, or in tourist camps or tourist homes, motor courts, or motels, or for the use or occupancy of space in parking lots, warehouses, or storage garages, does not constitute rent from real property. Generally, services are considered rendered to the occupant if they are primarily for his convenience and are other than those usually or customarily rendered in connection with the rental of rooms or other space for occupancy only.

The supplying of maid service, for example, constitutes such service; whereas the furnishing of heat and light, the cleaning of public entrances, exits, stairways, and lobbies, the collection of trash, etc., are not considered as services rendered to the occupant. Payments for the use or occupancy of entire private residences or living quarters in duplex or multiple housing units, of offices in any office building, etc., are generally treated as rent from real property.



  • Rentals of real property are generally excluded from unrelated business income in the Internal Revenue Code.
  • Schools (as a “qualified organization”) have the benefit – under I.R.C. Section 514(c)(9) – to be excluded from the ‘unrelated debt-financed rules.’
  • Understand, that when services are rendered that would result in unrelated business income, you need to be prepared to use a reasonable methodology for allocating expenses to the unrelated activities.
  • Take a look at “Tax Tips” from May 17, 2017, “Dual-Use Facility Expenses” for more information on this issue.


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.

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