Tax-Exempt Use Property

• Author: William F. Machen
• Pages: 31-41

6.1. Tax-Exempt Entity Leasing Rules

Code §168(h) contains a comprehensive set of rules dealing with

leases of property to “tax-exempt entities.” Under these rules, real

property that is leased to a tax-exempt entity in a “disqualied

lease” is treated as “tax-exempt use property.” Tax-exempt use real

property must be depreciated using the straight-line method (with-

out regard to salvage value) over the longer of (i) 40 years or (ii)

125 percent of the lease term. In addition, expenses that otherwise

would constitute qualied rehabilitation expenditures eligible for

the Rehabilitation Tax Credit are ineligible for such credit.

The Code provides that the term “tax-exempt use property”

does not include any portion of a property if such portion is pre-

dominantly used by the tax-exempt entity (directly or through

a partnership of which such entity is a partner) in an unrelated

trade or business the income of which is subject to tax under

section511.”

72

The legislative history of the provision provides

that property will not be treated as predominantly used by the

tax-exempt entity in an unrelated trade or business, the income

of which is subject to tax under Code §511 merely because the

property is debt-nanced property under Code §514.

73

The same

72. I.R.C. §168(h)(1)(D).

73. H.R. R. N. 98-861, at 791 (1984) (Conf. Rep.), 1984-3 C.B. (Vol. 2) 45.

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