The general rule is that the ownership of debt financed assets by an income tax exempt organization results in taxable income to such organization.

The exception to general rule is that income and/or gain realized by a retirement Plan qualified under Section 401(a) of the Internal Revenue code in a transaction involving the purchase of real property subject to acquisition indebtedness does not result in a taxable event to the Plan (IRS Publication 598, Chapter 4, Pg. 15). There are, however, exceptions to the exception, as follows:

1. The acquisition price is not a fixed amount as of the date of purchase.

2. The amount of the debt or time of any payment depends, in whole or in part, upon any revenue, income, or profits derived from the real property.

3. The real property is leased back to the seller of the property or a person related to the seller.

4. The real property is leased to a disqualified person (i.e. the plan sponsor, trustee, plan beneficiary, lineal descendants of the former, or any 10% or more owner of the former).

5. The seller or the qualified Plan or person related thereto provide financing on terms other than those that are commercially reasonable.

6. The real property is held by a partnership and the Plan becomes a partner along with taxable entities which are partners and the principal purpose of any allocation to the Plan is to avoid tax.

Although the rules concerning unrelated business taxable income (UBTI) and that acquisition indebtedness creates UBTI for an otherwise income tax exempt organization are generally well known by tax professionals, the exception to the rule pertaining to qualified organizations and real estate investments is not so well known. The exception to the exception, however, could be a trap for the uninformed.