It often becomes necessary for a church to seek out tenants in order to meet the financial needs of the congregation. Some are happy to open their doors to other churches, while other desire schools or other groups to make better use of their facilities. Regardless of the approach, the type of tenant sought after can make a world of difference regarding your property taxes, especially if the tenant is a for-profit organization.
The following is a brief overview and the proper professional should be consulted as the laws in this area are vast and complicated.
Provided the real property is owned and operated for religious or other charitable purposes, institutional property tax exemptions are available. However, the church’s use of the property is a determining factor in addition to the exempt status of a tenant in examining whether or not the property will be exempt from property taxes.
There are three basic types of property tax exemptions available in California; Church, Religious, and Welfare. A Church exemption applies only to areas used exclusively for worship or parking. The exemption does not apply to areas used for fellowship or other non-worship activities. Religious exemption expands these criteria to property used for worship, fellowship, religious counseling, offices, parking, and schools’ grades twelve and under. The County Tax Assessor annually sends an exemption renewal statement in which the organization returns verifying that the use and ownership of the property have not changed. Once claimed, the exemption remains on the property until the status of the organization or use of the property changes. The Religious Exemption is also available if another church rents the property part-time for religious worship provided the owner church conducts worship services on the property as well.
If another qualifying organization uses all or part of the facility for religious or charitable purposes regularly, then the property is not eligible for the Religious Exemption. In this situation, the Welfare Exemption must be claimed by both the church and the other organization for the extent of that use.
Property owned by a claimant and used by others:
Property, or portions of the property, owned by a claimant and used by another organization is not eligible for the welfare exemption unless certain specific requirements are met. Under the California Constitution, and section 214 of the California Revenue and Taxation Code, the Legislature has the authority to exempt property: (1) used exclusively for a religious, hospital, scientific or charitable purposes; and (2) owned or held in trust by charitable nonprofit organizations operating for those purposes.
The Welfare Exemption must be claimed for uses of the property beyond the scope of religious worship and schools, or if the property is also used regularly by another charitable organization.
Claims for the Welfare Exemption must be filed annually with the county assessor in the county in which the organization’s property is located. The county assessor determines whether the property qualifies for the Welfare Exemption based on “how the property is used.” However, the county assessor may not grant the exemption unless the claiming organization already has a valid Organizational Clearance Certificate issued by the Board of Equalization. If the California Board of Equalization determines that an organization qualifies, the Board of Equalization will issue an Organizational Clearance Certificate to that organization. A copy of the Organizational Clearance Certificate is valid and can then be filed with claim forms in any County in California.
In short, the Welfare Exemption for property taxes is available to property owned by organizations that: (1) are formed and operated exclusively for qualifying purposes (charitable, hospital, religious, or scientific); (2) use their property exclusively for those qualifying purposes; and (3) have a current tax-exempt letter from the Internal Revenue Service or the California Franchise Tax Board.
Property is deemed to be irrevocably dedicated exclusively to one or more qualifying purposes provided that a qualifying organization’s organizational document contains a statement that irrevocably dedicates its property exclusively to one or more of those purposes, such as religious, or charitable.
An advantage of the Welfare Exemption is that it covers the greatest number of uses while the Religious Exemption is generally more desirable for the church-owned property because of its one-time filing provision.
If the owner of the property is a qualifying claimant, the property may be leased to another organization to operate without losing its exempt status, provided the lessee also meets the requirements and files a claim for the welfare exemption. However, any leasing arrangement should not be intentionally profit-making or commercial in nature.
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Disclaimer: Every situation is different and particular facts may vary thereby changing or altering a possible course of action or conclusion. The information contained herein is intended to be general in nature as laws vary between federal, state, counties, and municipalities and therefore may not apply to any given matter. This information is not intended to be legal advice or relied upon as a legal opinion, course of action, accounting, tax or other professional service. You should consult the proper legal or professional advisor knowledgeable in the area that pertains to your particular situation.