If a private individual leases a property to a non-profit, is there an exemption for property taxes for the term of the lease?
I understand that non-profit organizations do not have to pay property taxes on property that they own. However, if a private individual purchases a property and then leases it to a non-profit exclusively for non-profit use, can the individual owner claim exemption for property taxes for the term of the lease?
Joshua Escalante Troesh, CFP | MBA
Simply leasing a property to a non-profit will not, on its own, exempt a private individual from having to pay property taxes. Since property taxes are state taxes, the exemption will depend on the laws in your individual state. Non-profits are exempt from all state property taxes because they have an official exemption from the IRS which over-rides state law. The private individual, however, isn't a non-profit (approved by the IRS as a 501(c)3 corporation or other non-profit entity) and therefore doesn't fall under this rule.
You May Be Able To Avoid or Reduce Property Taxes
Some states do offer some property tax exemptions for property owners who lease property to non-profits, but the rules are often very restrictive and will vary state-by-state. Some states require you to get approved for the exemption, based on your property being for the public welfare, in an application process similar to applying for non-profit status.
Other states may require you to place the property in trust so that the property can forever only be leased to non-profits for non-profit uses. And others may include limits on your ability to sell or otherwise use the property in the future, including covenants (legal agreements) which are attached to title.
How to Get Guidance
To get help with the laws in your state, you will want to talk to a real estate attorney and a CPA in your state to get specific advice on whether you can and should attempt this. You can likely get referrals to professionals with specific knowledge in these areas from both your local state bar association (for an attorney) and the AICPA (for a CPA).
Additionally, there are likely numerous other tax strategies which are available to you. You are both a business owner and real estate investor and the complexities of your financial situation open up a lot of planning opportunities. I work with many business owners and real estate investors on their finances; you can schedule a quick call if you’d like to explore how I might be able to help you with other multi-decade tax planning strategies. Talking with a fiduciary financial adviser may uncover tax planning strategies and other financial planning strategies far beyond the avoidance of property taxes.