BARRY WILLBANKS
ASSOCIATE BROKER // REALTOR®
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Coldwell Banker
1377 El Camino Real, Menlo Park, CA 94025
CA DRE License Number(s): 00767861


Raul Rivera, attorney and founder of StartChurch, posted a report that a Miami, FL church received a $7.1 million tax bill for an innocent mistake.  Unfortunately the innocent mistake may have devasting consequences for a Presbyterian church.

Churches are generally exempt from property taxes based on their non-profit status.  However, many churches also lease to tenants without questioning the tenant's status.  In the case at point, the church leased a portion of its campus for approximately a decade to a for profit school.  This seemingly innocent mistake resulted in a property tax bill for the whole time, plus penalties and fees, for the space that was leased.  To add insult to injury, the rental income became taxable to the IRS as "income".  This double whammy tax slap may cause this church to close in bankruptcy.  It does not have the money. 

States typically have a statutory basis for granting a property tax exemption.  The purpose of the organization and the use of its property ("charitable, religious, scientific or literary purposes", to cite an example) would determine the exemption.   Churches, of course, can obtain a 501(c)(3) status from their State to operate for its religious purposes.  

How might a church avoid a similar mistake with tragic consequences?

     1.  Require your prospective tenant to provide written evidence that it has received a 501(c)(3) status from the State.  Keep a copy.  If, perchance the tenant has not obtained this status, but otherwise would qualify, require it as a condition of a lease to obtain this status.

     2.  Talk to a qualified tax advisor about the taxability of any rent, lease or use fees to be received from a prospective tenant.  Keep a copy of the advisor's response.

     3.  If you decide to pursue a lease with a for profit tenant, make budgetary provisions to pay the tax and file the appropriate forms with the taxing authorities.

     4.  Have your tax advisor determine whether the income to be received from even a tax-exempt tenant will be taxable to you as the landlord.  The conditions may vary from State to State.