Property Leased by For-Profits to Religious Groups May Not Be Tax Exempt

Case illustrates important need to address who pays property taxes in a rental agreement.

Victory Church v. Illinois Department of Revenue, 637 N.E.2d 463 (Ill. App. 1 Dist. 1994)

Key point: Property tax exemptions generally are strictly construed, and all doubts resolved against exempt status.

Key point: Property that is leased by a church from a for-profit business is not entitled to exemption from property taxation in some states even if it is used exclusively for religious purposes.

An Illinois court ruled that a building owned by a for-profit business and leased to a church for exclusively religious purposes was not entitled to an exemption from property tax under Illinois law.

A church leased a 2-story building and three vacant lots from a for-profit company. The building was used for church purposes and the vacant lots were used for parking. A state appeals court ruled that the properties were not exempt from tax. The court began its opinion by noting that it had to decide "whether property leased to a religious organization by a private, for-profit party and used for religious and school purposes is exempt from real estate taxes" under state law.

An Illinois statute exempts from property tax "all property used exclusively for religious purposes, or used exclusively for school and religious purposes … and not leased or otherwise used with a view to profit." The property owner insisted that this language refers to the nature of the activities occurring on the property rather than to whether or not the property owner is a nonprofit or for-profit organization. And, since the property was being used for religious purposes it should be exempt from tax despite the fact that it was owned by a for-profit business.

The state on the other hand claimed that it is the property's owner's use of the property rather than the lessee's use that is significant, and that the property owner in this used the property to generate rental income. The state argued that leasing property for a profit precludes exemption even when the lessee uses the property exclusively for religious purposes. It pointed out that the exemption statute (quoted above) specifically denies an exemption to property that is "leased or otherwise used with a view toward profit."

The appeals court agreed with the state's position, and ruled that the property was subject to property tax. It concluded that any property that is used for the primary purpose of producing income is used "with a view toward profit" and cannot exempt under the statute, and that "do decide otherwise would allow any private property not entitled to exemption to become tax exempt merely by leasing it to a religious or school organization."

Key point: Churches that rent property from a for-profit business should address the issue of property taxes in the rental agreement. The rental agreement should specify clearly which party will pay property taxes in the event the property is subject to tax. This often is overlooked.

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