Charitable Non-Profit Organization Leases Property From Another Owner

[PPJCPA]

My client (husband and wife) owns several rental properties. In 2018, they purchased a duplex home that is rented for profit on one side and on the other side, it is rented their non-profit organization. They set up a non-profit because the home is close to a children's hospital. They wanted to offer a home for those families that have to be in the area for a while and can't afford lodging costs. The home is purchased through a land trust.

The charitable organization did not pay rent in 2018. They do want to collect rent from the charity but donations were low in 2018 and didn't cover all the expenses of the property.

Additional information that may be helpful. The lease says that the Landlord (my clients) are responsible for property tax, insurance, repairs over $500 and improvements to the property. The lessee (non-profit) agrees to take responsibility for most aspects of property management, including recruitment of individual tenants, day-to-day maintenance, furniture, misc accessors, and repairs. The lease also states that rent is $1500 monthly but again, no rent was paid from the charity.

Questions:

- My experience with non-profits is very minimal. Is there anything I need to worry about in regard to my clients formed the Non-profit and want to rent to the non-profit?

- I would think that if no rent is collected, no expenses would be deductible. Is this correct?

- If I am correct on the question above, would I add this property to the tax return but show no rental income and no expenses? If yes, I would also not take any depreciation expense. Correct?

Feedback and guidance are greatly appreciated.

[Uncle Sam]

Yes - there's plenty to worry about. One of the restrictions that a not-for-profit entity must comply with is that there should be no private enurement to the benefit of anyone connected with the management of the not-for-profit entity. Violating that can jeopardize the tax exemption. I strongly suggest you read up on the tax laws pertaining to 501(c) entities. It sounds like in your case, it's a self-dealing situation.
Whether rent was physically paid or not, doesn't change the setup arrangement.

[PPJCPA]

Thank you, Uncle Sam.

When my clients came to me with this in 2018, I told them I had very little experience with 501(c)3s and they would need to seek help from someone else to help them set it up. They are philanthropists and I believe they are not trying to pull anything shady.

An attorney helped them set up the 501c3, get accepted by the IRS for non-profit status, and wrote the lease. My client filed the 990-N.

I am now trying to figure out how or what to report on their tax return for this property that was "rented" to the non-profit.

Per your post, I will do more research so I can make my client aware of the self-dealing situation.

Thanks again for taking the time to respond to my post. It is greatly appreciated.

[PPJCPA]

Yes - there's plenty to worry about. One of the restrictions that a not-for-profit entity must comply with is that there should be no private enurement to the benefit of anyone connected with the management of the not-for-profit entity. Violating that can jeopardize the tax exemption. I strongly suggest you read up on the tax laws pertaining to 501(c) entities. It sounds like in your case, it's a self-dealing situation.
Whether rent was physically paid or not, doesn't change the setup arrangement.

Uncle Sam - Does self-dealing still apply if the 501c3 has five board members? My client told me that the attorney who set up the non-profit told them if they had five board members (they are 2 of 5), this would avoid self-dealing. It is my understanding that it is still self-dealing if they are disqualifed person, ie. if they are managers of foundation, or substantial contributors.

[Uncle Sam]

I agree with you