Q: What are the potential tax ramifications for leasing ministry parking lots to outside entities?

A: Ministries should carefully consider the potential tax issues created by leasing ministry parking lots. A ministry may be subject to the Unrelated Business Income Tax (UBIT) if it is engaged in, and earns income from, an activity that does not specifically accomplish the ministry's tax-exempt purpose.

There are some considerations before leasing ministry parking space to businesses, schools, or local municipalities. While it may be tempting to gain the additional income, it could be subject to UBIT. The tax code defines UBIT as “the gross income derived by any organization from any unrelated trade or business regularly carried on by it,” less certain deductions.

UBIT applies when the following three conditions are met:

  1. The activity constitutes a trade or business.

  2. The trade or business is regularly carried on.

  3. The trade or business is substantially unrelated to the organization’s exempt purpose. In other words, the event for which a parking fee is collected must be unrelated to the ministry’s stated tax-exempt purpose. Further, it does not matter if the revenue generated from the trade or business is ultimately used for the ministry’s tax-exempt purpose.

Tax Implications of UBIT

Nonprofits will pay a 21 percent UBIT on any amount earned that exceeds $1,000 per year. For example, if a ministry earned $1,200 in profit subject to UBIT in 2017, the 21 percent tax would be applied to $200. See the IRS tax form 990-T and its instructions to help compute your estimated payment.

Ministries may be subject to UBIT in the following examples:

  • Property being rented is financed with borrowed money.

  • A ministry simply accepts a fee from the public for parking.

  • A ministry leases parking lot spaces to a third party who does not take over operation of the lot. Example: An adjoining business leases several parking spaces from the ministry, but the ministry maintains control throughout and potentially provides services (e.g., parking attendants, security, etc.)

A ministry would not typically be subject to UBIT if it leases an entire parking lot to a third party who takes complete control of the parking lot, which is known as rents from real property.

Complying with the Law

Ministries are required to file IRS Form 990-T if they have gross income of $1,000 or more in a taxable year from any unrelated trade or business that is not otherwise excepted from UBIT. The IRS publication, Tax Guide for Churches & Religious Organizations, is a useful resource that discusses UBIT and its exceptions in greater detail.

Since property tax exemptions are governed by state and local law, ministry leaders are encouraged to speak with a locally licensed attorney to determine the parameters for maintaining a property tax exemption.

Potential Ramifications

UBIT - Ministries are at risk of losing their federal tax-exempt status –if they earn more than 15 percent of their gross revenue from Unrelated Business Income. This could result in the loss of the deductibility of charitable donations to the ministry, as well as the loss of exemptions from applicable property taxes and sales tax.

Property Tax Exemption – Depending on the applicable state laws, a ministry could also lose all or part of its property tax exemption when leasing ministry property. Generally, a ministry’s property must be used exclusively for exempt purposes to benefit from a property tax exemption. The property tax exemption can be lost for the entire property or a portion of the property if it is being used for non-exempt purposes such as leasing space to a third party. For example, a ministry that owns a multi-level parking garage, but leases it to the city Monday through Friday, may be jeopardizing its property tax exemption. Ministry leaders will want to talk with a local attorney about this state-specific issue.

Liability - In addition to tax ramifications, ministry leaders should also be aware of a potential increase of liability from others leasing a ministry’s parking lot. Depending on the circumstances, ministries could face liability for injuries or property damage that results from the third party’s use of the parking lot. Using written documentation to address issues such as liability and adequate insurance coverage may protect ministries from paying for others’ mistakes. Brotherhood Mutual offers a Sample Facilities Use Agreement, found below, that can serve as a starting point for ministries to create their own agreement with the assistance of a local attorney.

More Resources

Brotherhood Mutual has developed several resources that discuss UBIT in greater detail, as well as pitfalls and risk management steps when lending church facilities to other groups:

Additionally, Brotherhood Mutual provides a Sample Facilities Use Agreement that includes recommended provisions. Ministry leaders are encouraged to consult with a locally licensed attorney when developing such an agreement to ensure compliance with all applicable law.


*Important information: Brotherhood Mutual is pleased to provide Legal Assist as a complimentary resource. The services we offer through Legal Assist are intended to provide general legal information to our current and prospective policyholders.

The information we provide is intended to be helpful, but it does not constitute legal advice and is not a substitute for the advice from a licensed attorney in your area. Accordingly, no attorney/client relationship is created through Legal Assist, and no legal advice will be provided. We strongly encourage you to regularly consult with a local attorney as part of your risk management program.