Real Estate Property Tax Exemption and Adherence to Tax-Exempt Activities

We recently reviewed a very interesting opinion letter issued by the Alabama Attorney General, interpreting the real estate property tax exemption for charitable organizations in the state.  Like most states the law provides that in order to qualify for an exemption, the use of the property must be “exclusively” for its charitable purpose.  In this case, a substance abuse treatment center applied for the exemption listing certain rental income.  The attorney general’s opinion concluded that receipt of the rental income did not preclude granting the exemption so long as the income was used to further the tax-exempt purpose of the center.

Comment: If a charity has an exemption from property tax in a state that requires the property to be exclusively used in pursuit of its tax-exempt purpose, it becomes increasingly important how relationships are structured with commercial entities. Theoretically, the charity would lose its exemption in a state with such a restriction if it were required to file an IRS 990-T because of the receipt of unrelated business income. Therefore, it makes more sense to try to pursue relationships on the basis of a royalty agreement than any other structure.