The Risk of Losing Church Property in a Tax Sale

Recent case illustrates need for churches to monitor the tax status of their property.

Background. Occasionally, a church will inadvertently lose its property tax exemption due to a failure to comply with a technical provision of the property tax law. This may occur due to a failure to renew an existing exemption by filing a required form. When this happens, the local taxing authority may be empowered to sell church property to collect the delinquent property taxes. This scenario happened in a recent case.

From 1986 through 1998, a church’s parking lot had been listed on the county tax assessment rolls as exempt from taxation. From 1999 through 2003 the parking lot was moved to the tax assessment rolls and no longer was considered exempt. Upon discovering this, the church obtained legal counsel to correct the assessment rolls to reflect the property’s tax-exempt status.

In 2003 the church filed a petition with a local board of tax appeals for reinstatement of the exemption for its parking lot. But, while this appeal was pending, the tax assessor sold the church’s parking lot in order to cover the back taxes. A local court affirmed this sale, and the church appealed.

A state appeals court ruled that the church could vacate the sale of its parking lot based on the fact that it had initiated steps to reinstate the property’s tax exemption several months before the property was sold. It observed: “The church presented uncontested evidence that the pastor reasonably believed that the church parking lot was exempt from taxation for 1999 through 2003 when in fact it was not. Upon discovering that the parking lot was on the tax rolls, the church obtained counsel to correct the assessment records to reflect the exemption. All proper documentation was filed with the county board of review. This process was begun 15 months before the issuance of the tax deed order. Thus, the church was in the process of clearing up the tax errors when the tax deed was issued. Accordingly, we find that the church was sufficiently diligent in bringing its petition to vacate the tax deed judgment, particularly in light of the harsh result of issuing a tax deed to property that was later declared tax exempt.”

Relevance to church treasurers. This case illustrates three important points.

First, while church property generally is exempt from taxation in all 50 states (with some exceptions, such as property that is rented or used for commercial purposes), some states require exemptions to be renewed periodically. A failure to renew an exemption may result in the property being moved to the tax rolls; and, when the taxes are not paid, the property is subject to sale in order to recoup the taxes.

Second, to ensure that this never happens, church leaders should be familiar with any conditions or requirements that must be satisfied in order to maintain exempt status.

Third, if church property is sold in a tax sale, the property tax laws of most states provide a procedure for vacating such a sale so long as the church is diligent in pursuing this remedy. New Holy Temple Missionary Baptist Church v. Discount Inn, 2007 WL 438254 (Ill. App. 2007)

This article first appeared in Church Treasurer Alert, April 2007.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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