As state and local governments face mounting budget deficits and seek ways to raise revenue without raising tax rates, nonprofit organizations must consider the fact that they may be facing taxation on some or all of their property. Many nonprofits are under the misconception that because an organization is nonprofit or exempt from federal income taxes, it is automatically exempt from all forms of taxation.

What you need to know when acquiring property.

Property taxes are administered at the state or local level. Most state laws provide an exemption from taxation for property owned and used by religious, nonprofit charitable, scientific, or educational organizations. The statutes and case laws of each state often differ on what property and/or organizations are eligible for exemption, the requirements to qualify for the exemption, and the steps necessary to obtain the exemption. Note that the state laws may differ significantly from Federal definitions or determinations.

When an exempt organization is considering the acquisition of property, it is important to review the property tax statutes for that jurisdiction. In most states, it is necessary for the property to be owned and occupied by the exempt organization in order to qualify for exemption. The fact that property will be utilized for exempt purposes does not automatically exempt that property from taxation. The requirements for exemption from property taxes may vary greatly from state to state.

Exempt organizations contemplating operations in a new location need to review the local requirements for exemption from property taxes whether or not they will own the real estate. Property tax exemptions may extend to real property (land and buildings) and personal property (equipment, furniture, computers, etc.). Organizations should note that an exemption from property tax may not be automatic: many taxing jurisdictions require that an application for exemption be completed prior to granting the exemption. In some instances, the application will be required by law and with others it is simply a procedure set by the local jurisdiction. Without the appropriate information about your organization, including its purpose and use of the property the assessor may not be able determine your eligibility for exemption. It is the responsibility of the nonprofit to contact the assessor and provide the necessary information to make that determination. Some taxing jurisdictions will not grant an exemption retroactively and refund past taxes. This is an opportunity missed. Therefore, it is important to determine your organization’s eligibility requirements for exemption before it receives its first assessment notice. If the organization does receive an assessment notice it is important to contact the assessor right away because it may be possible to correct the assessment. Do not assume that the property tax assessment is proper.

Intended use impacts exemption

Many states will stipulate that the property be used strictly for the exempt purposes for which the federal or state tax exemption was granted. Additionally, some states will require that the amount of property eligible for exemption must reasonably be in proportion to the current needs of the organization. In other words, an exempt organization may not obtain an exemption for property that it is holding but is not using for its mission or is deemed to be in excess of what is needed for the current operations of the organization. Many exempt organizations renting excess space to other organizations may have to face the reality of paying property taxes. In most cases, this should lead to taxation on only that portion of the facility being used by the other organization. It is important to understand the state and local tax statutes that govern exemptions when determining the potential property tax liability, whether or not the property owned by your organization is being utilized by another nonprofit or for-profit organization. Organizations with unrelated business income (UBI) are at a greater risk of property tax exposure if the UBI is attributable to property owned or held by the organization.

This represents just a few property tax issues that an exempt organization should consider when reviewing its existing property holdings and any contemplated acquisitions. Property tax laws and rules can be quite complex and it is important to have an understanding of these laws in order to avoid unnecessary taxation. Taxing jurisdictions are and will be paying much closer attention to all eligibility requirements to ensure exemptions are properly allowed. Any violation of the established state or local exemption requirements will likely result in taxation of some or all of the property. As with other areas of taxation, form often takes precedence over substance with regard to property tax exemptions. The fact that an organization may qualify for the exemption is of little value if the proper forms and documentation have not been submitted in a timely manner. Due to the complexity of the various property tax systems across the country, it is in an organization’s best interest to locate a property tax specialist to help address these issues.