August 23, 2004
PROPERTY TAX TREATMENT OF NON-PROFIT ORGANIZATIONS RENTING SPACE
By: Kevin E. McCarthy, Principal Analyst
You asked for the law and practice in Connecticut regarding the tax treatment of property a non-profit organization owns and lease to another non-profit organizations. The example you provided was a church leases space to two non-profit organizations, receiving less than $10,000 in rent annually. You also asked (1) whether there have been bills introduced on this topic in recent years and (2) how other states treat property leased by non-profit organizations.
The law generally treats as taxable property owned by a church or other tax-exempt organization that is leased to another organization for a different purpose. But municipalities can, by ordinance, exempt property leased to a tax-exempt charitable, religious, or non-profit organization, so long as the property is used exclusively for such purposes. In practice, it appears that most municipalities tax such leased space if a substantial amount of rent is paid.
The legislature has considered four bills related to this issue since 1990. Most recently, in 2000, the Human Services Committee heard, but took no action on, a bill that would have exempted leased property if it was used to further the purposes of the non-profit owner.
Statutes in only a few other states specifically address this issue. New Jersey exempts from property tax that part of the property owned by a church, school, or hospital that is leased to a tax-exempt entity and is used for tax-exempt purposes. Arkansas appears to exempt property that is partially used for church purposes and partially for other tax-exempt purposes. On the other hand, many states require that property be used exclusively for religious or other enumerated purposes in order to be tax-exempt.
LAW AND PRACTICE
Among other things, CGS § 12-81 exempts from the property tax:
1. property used exclusively for charitable, educational, and certain other purposes;
2. houses of worship;
3. property of religious organizations used for schools, parish houses, and certain other purposes (day care is not one of these purposes);
4. hospitals; and
5. property owned by veteran's organizations.
Under CGS § 12-88, if property owned by charitable, educational, and religious organizations is not used exclusively for one or more of these purposes, the part of the property that leased, rented, or otherwise used for other purposes is subject to taxation. But, under CGS § 12-81(52) a municipality may adopt an ordinance exempting from tax real or personal property leased to a federally-tax exempt charitable, religious, or non-profit organization, so long as the property is used exclusively for such purposes.
According to James Clynes, president of the Connecticut Association of Assessment Officers, the tax treatment of properties such as the one you describe varies from municipality to municipality. Clynes notes that some municipalities make decisions on a case-by-case basis. Among the factors that assessors in such municipalities consider is the amount of rent that the non-profit owner receives for the space. He believes that most assessors would treat the leased space as taxable if the owner received a substantial amount of rent for it. Kathleen Rubenbauer, at the Office of Policy and Management, who works closely with assessors, also believes this to be the case.
The statutes described above have not been substantially amended in many years. The legislature has considered four bills related to your issue since 1990. In 1994, two bills were referred to the Finance, Revenue and Bonding Committee. The committee heard, but took no action on, SB 243, which would have given property leased by a non-profit organization the same tax exemption that applies to property owned by such organizations. It did not hear SB 271, which had the same provision but would have required the state to reimburse municipalities for the resulting revenue loss. In 1995, SB 249, which was identical to SB 243 of the previous year, was referred to same committee, which did not hear it. In 2000, the Human Services Committee heard, but took no action on HB 5691. This bill would have specifically provided that when a non-profit organization leases property to another non-profit organization for purposes that further the purposes of the first organization, the leased property would be exempt from property tax.
In most states, the property tax statutes do not specifically address the issue you raise. However, New Jersey exempts from property tax that part of church's property that is leased to a tax-exempt entity and is used for tax-exempt purposes. On the other hand, the space is taxable if it is leased to a profit-making organization or is used for taxable purposes N.J. Rev. Stat. § 54:4-3.6. Property owned by educational institutions and hospitals is subject to similar treatment.
In Arkansas, property owned by a church is taxable if it is held for, or used for, commercial, business, rental, or any other purposes other than church purposes. But, property that used partially for church purposes and partially for other purposes is tax-exempt Ark. Rev. Stat. 26-3-206. Thus it would appear that space that was used for a day care center during the week and a church school on the weekends would be tax exempt. On the other hand, a church-owned building that was only used for day care purposes would appear to be taxable.
In many states, property must be used exclusively for religious or other enumerated purposes to be tax-exempt. Thus it would appear that church property used for day care purposes would be taxable in states such as Alabama, Alaska, Georgia, Idaho, Illinois, Kansas, Maryland, Mississippi, Missouri, Montana, Nebraska, Ohio, Oklahoma, Utah, Virginia, Wisconsin, and Wyoming.
In Florida and South Carolina, the property owned by a religious, charitable, or educational organization must be used “predominantly” or “primarily” for the organization's purposes to be tax-exempt. Florida provides criteria for determining the tax status of property used for multiple purposes, which include the extent to which the owner leases out space at or below cost to tax-exempt organizations (Fla. Rev. Stat. § 196.196). In Arizona, Delaware, Hawaii, and New Mexico, all noncommercial property owned by a religious organization is tax-exempt. In Iowa, property owned by a religious or charitable organization is taxable if it is leased “with a view to pecuniary profit.”