Publication 598 |
2001 Tax Year |
Allocation Rules
When only part of the property is debt-financed property, proper
allocation of the basis, debt, income, and deductions with respect to
the property must be made to determine how much income or gain derived
from the property to treat as unrelated debt-financed income.
Example.
X, an exempt college, owns a four-story office building that it
bought with borrowed funds (assumed to be acquisition indebtedness).
During the year, the lower two stories of the building were used to
house computers that X uses for administrative purposes. The two upper
stories were rented to the public and used for nonexempt purposes.
The gross income X derived from the building was $6,000, all of
which was attributable to the rents paid by tenants. The expenses were
$2,000 and were equally allocable to each use of the
building. The average adjusted basis of the building for the year was
$100,000 and the average acquisition indebtedness for the year was
$60,000.
Since the two lower stories were used for exempt purposes, only the
upper half of the building is debt-financed property. Consequently,
only the rental income and the deductions directly connected with this
income are taken into account in computing unrelated business taxable
income. The part taken into account is determined by multiplying the
$6,000 of rental income and $1,000 of deductions directly connected
with the rental income by the debt/basis percentage.
The debt/basis percentage is the ratio of the allocable part of the
average acquisition indebtedness to the allocable part of the
property's average adjusted basis: that is, in this case, the ratio of
$30,000 (one-half of $60,000) to $50,000 (one-half of $100,000). Thus,
the debt/basis percentage for the year is 60% (the ratio of $30,000 to
$50,000).
Under these circumstances, X must include net rental income of
$3,000 in its unrelated business taxable income for the year, computed
as follows:
Rental income treated as gross income
from an unrelated trade or business (60% of $6,000) |
$3,600 |
Less the allowable portion of
deductions directly connected with that income (60% of $1,000) |
600 |
Net rental income included by X in
computing its unrelated business taxable income from debt-financed
property. |
$3,000 |
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