UBIT: How it applies to debt-financed property
If a tax-exempt organization engages in a business that is unrelated to its primary purpose, the general rule is that income will be considered unrelated business taxable income and any net income will be subject to the unrelated business income tax (UBIT).
The tax law contains a number of exclusions, including for dividends, interest and rents from real property. However, when debt is incurred by an exempt organization to acquire an income-producing asset, UBIT is applicable to that portion of the income or gain that is debt-financed, with some exceptions.
This type of income is often referred to as unrelated debt-financed income (UDFI).