Property tax considerations may sometimes influence a decision about how to structure ownership or use of land, particularly in California where, as a result of Proposition 13, a property is generally not re-appraised and taxed at current market value until there is a change of ownership. As a result, many people try very hard to structure shared ownership relationships in ways that will not result in frequent changes of ownership. For example, owning property through an entity such as an LLC means that a member may join or leave the LLC without triggering a “change of ownership” and re-assessment, so long as the member does not own more than 50% of the interests in the LLC. [98. The California Board of Equalization regulations provide very clear and detailed explanations of what constitutes a change of ownership. The regulations are contained in the Property Tax Law Guide, Article 4. “Change in Ownership and New Construction” (Sections 460–500).]
Sometimes the use of a property may entitle the owners to a property tax break. For example, in California, the Williamson Act provides reduced property tax assessments for land that is used for agricultural purposes for an extended period of time. The Williamson Act does, however, limit the number of dwelling units that can be constructed on a parcel. Even when people intend to build very humble dwellings and live in ways that will have a low ecological impact, the Williamson Act may prove to be too limiting.
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Property Tax Exemption
As communities rethink their relationships to land, the role of property tax exemption will be interesting to consider. In Walz v. Tax Commission, [99. Walz v. Tax Comm’n of City of New York, 397 U.S. 664 (1970). ] the U.S. Supreme Court acknowledged the public purposes behind property tax exemption: “[States have] determined that certain entities that exist in a harmonious relationship to the community at large, and that foster its “moral or mental improvement,” should not be inhibited in their activities by property taxation or the hazard of loss of those properties for nonpayment of taxes.”
Every state has a different framework for deciding when to grant property tax exemption. Some states will grant exemption for properties used for affordable housing or land conservation, and other states may not. Generally, states grant property tax exemption to charitable, scientific, church, and hospital organizations, depending on the actually use of the property. The way the property tax exemptions are administered in California, for example, is that the state makes a determination of whether an organization is eligible to receive a property tax exemption on the property it owns. Then the county tax assessors make a determination of whether the property owned by the organization qualifies for the exemption, based on how the property is being used. [100. California State Board of Equalization, “Publication 149: Property Tax Welfare Exemption,” March, 2008.]
Property Tax Exemption for Housing Connected with Nonprofit Activities
Providing living quarters to people involved in a nonprofit’s work might qualify an organization for property tax exemption, but you may need to demonstrate that the provision of those living quarters is reasonably necessary to achieving the nonprofit’s purposes. For example, in the case of a farm education center, you could show that the housing is provided only to staff, volunteers, and students of the nonprofit education center, and only because living on site is necessary to full participation in the program. A nonprofit that offers housing to staff as an optional benefit may or may not be able to receive property tax exemption for the housing.
Note that some states limit the types of educational activities for which an organization may receive property tax exemption. In California for example, land used for educational purposes must be aimed at providing education to the general public and a broad community, as opposed to a specified group of people. [101. California State Board of Equalization, “Publication 149: Property Tax Welfare Exemption,” March 2008.]
Property Tax Exemption for Affordable Housing
Some, but not all, states offer property tax exemption to nonprofit organizations that own properties for the purpose of creating affordable housing, which is considered a charitable activity. For nonprofits that have created affordable housing, the state may require that you meet additional requirements and provide detailed documentation about tenants and their incomes. For example, in California, you must demonstrate that:
- “The property use is restricted to low-income housing by a regulatory agreement, recorded deed restriction, or other legal document if the property is owned by a nonprofit corporation.
- “The funds that would have been necessary to pay property taxes are used to maintain the affordability of the housing or to reduce the rents for the units occupied by lower income households.
- “The property receives either federal low-income housing tax credits or government financing, or 90 percent or more of the tenants are qualified low-income tenants within the prescribed rent levels, if the property is owned by an eligible nonprofit corporation.” [102. California State Board of Equalization, “Publication 149: Property Tax Welfare Exemption,” March 2008.]
Property Tax Exemption for Conservation Land
Some states provide property tax exemption to nonprofits that own land for conservation purposes, usually on the grounds that the land conservation meets a charitable or scientific purpose. Other states grant tax exemption for properties under conservation easement, whether or not the property is owned by a nonprofit. [103. The Land Trust Alliance provides a helpful list of State and Local tax incentives for land conservation at: http://www.landtrustalliance.org/policy/tax-matters/campaigns/state-tax-incentives] For example, Florida gives all property owners tax exemption if the property is under a conservation easement owned by a nonprofit, and if the easement and land meet certain criteria, roughly mirroring the requirements of the IRS tax deduction for conservation easements. [104. Florida House Bill Number 7157, Chapter 2009-157, available at http://laws.flrules.org/files/Ch_2009-157.pdf] Other states, such as Maryland, take a different approach, offering a property tax credit rather than a property tax exemption. [105. See the Maryland Conservation Property Tax Credit Application]