Tax-exempt organizations are actually not exempt from all
taxes; entities that qualify under section 501(c)(3) are merely exempt from
income tax. See I.R.C. § 501(a). Many still pay tax upon “unrelated
business taxable income.” See I.R.C. § 511(a)(1). This tax is known as
UBIT (unrelated business income tax). UBIT not only reaches income from an
unrelated trade or business, it also reaches passive income from property that
is debt-financed. I.R.C. § 514(a).

Section 514(c)(9), however, provides an exception: Debt-financed real property will not be subject to UBIT if the debt is “incurred by a qualified organization in acquiring or improving any real property.” I.R.C.… Read More