Real Estate Transactions by Tax-Exempt Entities (Portfolio 480)


Bradley Borden

Professor of Law

Brooklyn Law School

At a glance

I. Introduction
II. Unrelated Business Income Tax
III. Corporate Ownership of the Investment Rather Than Direct Ownership
IV. Joint Venture Participation
V. Limited Liability Companies as Exempt Organizations
VI. Investment Through Specially Treated Conduit Organizations
VII. Retirement Plans
VIII. Foreign Government Pension Plans


The Bloomberg Tax Portfolio, Real Estate Transactions by Tax-Exempt Entities, No. 480, analyzes the tax considerations pertinent to the investment by exempt entities, including pension trusts, in real estate.

Exempt organizations are taxed on their unrelated business taxable income (UBTI). A primary concern of exempt organizations that invest in real estate is UBTI. Generally, gross income of an exempt organization is UBTI if: (i) the income is derived from the conduct of a trade or business; (ii) the business activity is regularly carried on; and (iii) the conduct of the business activity is not substantially related to the organization's exempt function. Tax law excludes from UBTI certain types of income that would otherwise come within the definition of UBTI.

Of central importance to exempt organizations that invest in real estate is the exclusion from UBTI of rents from real property. To qualify for this exclusion, the rent must be from property that comes within the definition of real property. Another initial concern is whether a transaction is characterized as a lease, a loan, or a partnership. Rents from personal property are not subject to UBTI rental exclusion, although the law disregards incidental rents from personal property. Tax law includes in UBTI rents from real property that are dependent on the income or profits derived from the leased property. This Portfolio examines in detail various permissible and impermissible rental formulas.

Tax law also excludes interest from UBTI. Qualifying interest does not, however, include amounts determined with respect to income or profits. This Portfolio examines the circumstances in which debt may be recharacterized as equity, as well as the treatment of contingent interest.

Income and deductions that would otherwise be excluded from UBTI may nevertheless be subject to taxation if incurred with respect to debt-financed property. This Portfolio examines various real estate-related aspects of the debt-financed property rules.

Other topics addressed by the Portfolio include corporate ownership of investments rather than direct ownership by the exempt organization, joint venture participations by exempt organizations, limited liability companies as exempt organizations, investment through specially treated conduit organizations, state or municipal retirement plans, foreign government pension plans, ERISA and state law considerations, and prohibited sale-in, lease-out (SILO) and lease-in, lease-out (LILO) transactions.

This Portfolio may be cited as Borden, 480 T.M., Real Estate Transactions by Tax-Exempt Entities.

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