Is our rental income taxable?

Unrelated business taxable income is income from a trade or business regularly carried on that is unrelated to the purpose for which the recipient is exempt.  The fact that you may use the income to further your mission is not the deciding factor.  The character of the activity that generates the income is the deciding factor.  (See Ready Reference Page: “Nonprofits Often Worry About UBIT”)

If you were a community center renting to social service nonprofits providing services to your community, you might be able to argue that the rentals were critical to your exempt purpose.  It doesn’t sound as though you could make that argument here.   Therefore, you are probably generating unrelated business taxable income that could be subject to unrelated business income tax (“UBIT”)

That is not the end of the inquiry, however, because Congress has provided for “modifications” to UBIT that permit certain passive income sources, including rental of real estate, without imposing the tax.  I am not sure how you purchased a “portion” of the school unless you bought a couple of condominium units.  If you own the property and are not providing exceptional services with your rental, you may be exempt from UBIT on the income, but only if the property was acquired without “acquisition indebtedness,” generally a mortgage of some kind.  If it is subject to a mortgage, your taxable income will be the amount of net income equal to the portion of your cost of the property that is subject to the mortgage.  If your mortgage is for 50% of the cost of the property, 50% of the profit will be subject to tax.  An attorney or accountant who understands these issues should be able to help you decide whether you have UBIT or not, and if so, how much.