How to avoid UBIT on sale of building.

• Author: Berger, Harvey J.
• Position: Unrelated business income tax - Brief Article

In a recent letter ruling, the IRS has indicated a method by which organizations can avoid the unrelated business income tax (UBIT) on the sale of a debt-financed building.

Generally, rents from real property and gains on sale are not subject to UBIT. If there is acquisition indebtedness on the property, however, a portion of the rental income or gain will be subject to tax.

In Letter Ruling 9407023, an association owned its headquarters building, 65% of which was used for related purposes and 35% leased to tenants. The building was debt-financed. The association had plans to sell the building, and was concerned about paying tax on the sizable gain that would result.

Under the law, the UBIT rules do not apply if there had been no acquisition debt outstanding on the property for 12 months prior to its sale. Therefore, the association paid off the debt from its reserves a year before the sale. It then opened a line of credit to handle cash flow needs that could arise from operations. It also borrowed money to purchase land and construct a new building.

The association was concerned that the line of credit and the loan on the new property would be attributed to the building that was to be sold. If that were the case...