What is Unrelated Business Income?

Any trade or business that is regularly carried on, which is not substantially related to the charitable purpose of the organization, produces unrelated business income. The fact that the income is used to create funds that are used to further the charitable purpose does not exempt the activity from taxation.


1. Activities in which substantially all the work is performed by unpaid volunteers.

2. Activities carried on for the convenience of the members or employees.

3. Selling merchandise that has been received as gifts or contributions (such as a church bake sale).

4. Dividends, interest, annuities, royalties, capital gains and losses, and rents from real property:

Exception: Debt-financed Property – Property that is held to produce income and is subject to “acquisition indebtedness” (such as a mortgage) at any time during the tax year is unrelated business income unless:

85% rule – if 85% or more of the total property is used for exempt purposes then the income is not considered to be unrelated business income. If less than 85% of the property is used for the exempt purpose than that part of the property, which is not used for exempt purpose, is considered to be unrelated business income.

The neighborhood land rule – If an exempt organization acquires property with the intent of using it for exempt purposes within 10 years (15 years for churches) than income which is produced during that time is not unrelated business income. See IRS publication 598 for details.

Note: Rent on real property is considered unrelated business income when the rent is based on a percentage (such as a percentage of profit). Rent should be a flat rate in order to qualify for any of the exceptions above.

For more information see IRS Publication 598.

Attention: Tax Law is subject to interpretation. Please be advised that the material contained on this Web site is for information only and is not intended to be a substitute for professional legal advice. The Stewardship Services Foundation endeavors to update the information on this site on a regular basis, but cannot guarantee its accuracy at all times.