The formulas
- Percentage = average acquisition indebtedness / average adjusted basis (not above 100%)
- Income included = percentage x gross income from the property
- Deductions allowed = percentage x directly connected deductions (straight-line depreciation)
How it works
Income from property bought with borrowed money can be taxed to a tax-exempt organization even if it is rent, interest or dividends that would otherwise be excluded. Section 514 includes the share of the income that matches the share of the property that is debt-financed. The same percentage of directly connected deductions is allowed.
Depreciation must use the straight-line method. Property used for the exempt purpose is excluded to the extent of that use, and several other exceptions apply. Averages are measured over the part of the year the property is held. Gain on sale uses the highest debt in the prior 12 months, which is not modeled here. The result is added into unrelated business taxable income on Form 990-T, where the specific deduction of $1,000 under section 512(b)(12) applies.
Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
What is acquisition indebtedness?
Debt incurred to acquire or improve the property, including debt incurred afterward that would not have been incurred but for the acquisition or improvement.
Do real property exceptions apply?
Some qualified organizations such as schools and pension trusts have exceptions for real property, with conditions.
Is this the same as the UBIT calculator?
No. This one covers only debt-financed property under section 514.
Sources
- 26 U.S.C. 514 Unrelated debt-financed income, Cornell LII
- 26 U.S.C. 512 Unrelated business taxable income (subsection (b)(12)), Cornell LII
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