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Caution IRA’s and 401(k)’s that own rental properties: Coin-operated laundry facility resulted in Unrelated Business Taxable Income (UBTI) but additional parking income did not. 

FACTS:  The Taxpayer owns an apartment complex that is not subject to any liens or indebtedness.  Taxpayer holds and operates the apartment complex, which is comprised of several hundred rental apartments and is typically fully rented.

City ordinances require the apartment complex to provide two off-street parking spaces per apartment unit. Parking space is incidental to occupancy. Renters cannot opt out or lease these parking spaces to non-residents. None of the parking is available to the general public. Surface parking is provided at no additional charge in the basic monthly rent.  However, some apartments come with designated covered carport parking spaces for which a small additional charge is added to the monthly rent. No personal or special services are provided with the parking spaces, whether covered or not.

Monthly rent for the tenants of the apartment complex includes some utilities, including cable TV and internet services that are provided to all units through the complex’s proprietary system. Nearly all apartments are furnished with washers and dryers at no additional charge. Apartment complex also provides coin-operated washers and dryers on-site for use of tenants without in-home laundry.

While the apartment complex does not record parking as a separate revenue stream, Taxpayer estimated that the monthly revenue for the parking and coin laundry represents less than 1% of its gross revenue.

Background—UBTI rules.  Rents from real property are excluded from UBTI.  But, payments for the use or occupancy of rooms or other space where services are also provided to the occupant are not rents from real property for purposes of computing UBTI. Services are considered rendered to the occupant if they are primarily for his convenience, e.g., maid service, and are other than those usually or customarily rendered in connection with the rental of space for occupancy only, such as heat, light, cleaning of public areas, and trash collection. Thus, rents for hotels, boarding houses, parking lots, warehouses, or storage garages aren’t rents from real property.

IRS concluded that the carport fees aren’t UBTI, but the coin-operated laundry revenue is UBTI. Any incidental payment for parking is excluded from UBTI as rent from real property.  The IRS said that no personal or special services are provided with the parking spaces, whether covered or not.  The roof on the carport is not a special service for the convenience of the occupant, but a characteristic of the real property.  No services, such as a security guard, are provided, and covered spots are charged only a minimal monthly amount in the set rental rate.

In contrast, IRS said, the apartment complex does actively operate a business—the on-site coin-operated laundry facilities.  While not uncommon in a residential complex, it is a service for the convenience of the renters whose units do not include washers and dryers.  Residents could use commercial laundry and cleaning establishments off-site.  It is more convenient for residents to have laundry facilities on-site, and the apartment complex generates income from the coin-operated machines in direct relationship to usage of the service. This income is UBTI.

IRS noted that the apartment complex provides some utilities in the basic monthly rent, including cable TV and internet. Including utilities in rent is a common practice in apartment complexes, where individual metering for water, gas, or electricity, and wiring for individual cable may not be available. Apartment complex supplies washers and dryers in most apartments, an example of incidental personal property leased with the real property.

© 2014 Douglas Rutherford, CPA, CGMA.  All Rights Reserved.  Douglas Rutherford is a nationally recognized CPA practicing in the real estate industry. He is the founder of Rutherford, CPA & Associates, and the President and CEO of RentalSoftware.com. He is also the developer of the national leading real estate investment analysis software, the  Cash Flow Analyzer ® & Flipper’s ® software products. Doug earned his Masters of Taxation degree from Georgia State University, Atlanta, GA.

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