Churches are always looking for ways to strengthen their financial position and create sustainable sources of income.
What if a cute little house across from your church was for sale at a great price?
Interesting question: Can a church purchase a house, apartment, commercial building, or other property and rent it for income?
The short answer is yes. A church can generally own rental property and receive rental income. However, before becoming a landlord, church leaders should understand several important tax, legal, accounting, and liability considerations.
Rental Income Can Be Tax-Exempt
One of the first concerns churches have is whether rental income will jeopardize their tax-exempt status.
Generally, rental income received from real property—such as a house, apartment building, office building, or farmland—is excluded from Unrelated Business Income Tax (UBIT). This means a church may be able to collect rental income without paying federal income tax on that revenue.
However, there are some important exceptions.
Be Careful When Borrowing Money
One of the biggest considerations is how the church purchases the property.
Suppose a church uses $250,000 of existing cash to purchase a duplex. The church rents both units to the public and uses the rental income to help fund its ministries.
If the property is debt-free and the church provides only normal landlord services, the rental income would generally be excluded from UBIT.
But suppose the church puts $50,000 down and borrows the remaining $200,000. Now the situation becomes more complicated.
IRS rules regarding debt-financed property can cause a portion of the rental income to be treated as taxable unrelated business income. Before financing an investment property, churches should have a CPA or tax professional familiar with nonprofit organizations review the proposed transaction.
Property Tax Is a Separate Issue
Church leaders should also remember that federal tax-exempt status does not automatically make every property owned by the church exempt from local property taxes.
A church’s sanctuary and ministry facilities may qualify for a property-tax exemption because they are being used for religious purposes. A rental house or commercial building purchased primarily to generate income may not qualify for the same exemption.
Property-tax rules vary by state and locality, so churches should investigate this issue before purchasing the property.
Consider the Services Being Provided
There is also a difference between simply renting real estate and operating a business.
Normal landlord activities—such as collecting rent, maintaining the property, making repairs, and providing utilities—generally do not transform rental income into business income.
However, providing substantial additional services to tenants can potentially change the tax treatment. Things like maid services or transportation. This becomes especially important with properties operated more like hotels, event facilities, or other service-oriented businesses.
Don’t Forget About Liability
Owning rental property means the church is also becoming a landlord.
That creates additional risks involving tenants, visitors, maintenance, injuries, property damage, leases, security deposits, and compliance with landlord-tenant laws.
Before purchasing rental property, churches should speak with their insurance agent to determine whether their existing church insurance policy provides appropriate coverage. An attorney should also review leases and advise the church regarding how the property should be owned.
Depending on the circumstances, church leaders may want legal counsel to evaluate whether the property should be owned directly by the church or through another legal structure.
Keep the Accounting Separate
If a church purchases rental property, the financial activity should be clearly identifiable in the accounting records.
Churches should separately track items such as:
- Rental income
- Property purchase price
- Land and building values
- Mortgage balances
- Mortgage interest
- Property taxes
- Insurance
- Repairs and maintenance
- Utilities paid by the church
- Property management expenses
- Depreciation
Separately tracking these items allows church leadership to determine whether the investment is actually producing the return they expected.
For example, receiving $30,000 per year in rent sounds attractive. But after insurance, taxes, repairs, vacancies, management costs, and other expenses, the property’s actual net income may be considerably less.
Make It a Board Decision
Purchasing investment property should not simply be viewed as another financial transaction. It represents an investment of church resources and creates an ongoing responsibility for the organization.
The church’s board should formally approve the purchase and document why leadership believes the investment is prudent and consistent with the church’s mission and governing documents.
Church leaders should also consider whether the money invested in real estate could be needed for emergencies, facility repairs, ministry expansion, or other priorities.
Business or Ministry?
Churches that fail to ask this question can end up in a no-win situation.
The church is the landlord. It must be prepared to do landlord things, like keeping deposits, saying no to beloved pets, and evicting people.
A church might have an unpaying renter for decades because they can’t bring themselves to force the issue. The plan for rental income would become a huge drain on church finances.
Trust me, someone will play the “A real church wouldn’t do that!” card at some point.
Define how you will handle these situations BEFORE you purchase rental property. Establish policies and be consistent with them. Consider using a property manager outside of the church.
The Bottom Line
Yes, a church can purchase rental property to generate income. In the right circumstances, real estate can provide a church with an additional source of long-term revenue.
But being tax-exempt doesn’t mean that everything a church does is automatically tax-exempt.
How the property is purchased, financed, operated, insured, accounted for, and ultimately used can have significant tax and legal consequences.
Before signing a purchase agreement, church leaders should consult with a CPA or tax professional experienced with churches, an attorney familiar with nonprofit and real-estate law, and the church’s insurance provider.
A rental property can be a valuable church asset—but it should be approached as a carefully evaluated investment rather than simply an easy source of additional income.
Need advice on purchasing rental property for your church? Give us a call! We love helping with this kind of stuff!