Must Charities Pay Property Tax on Inherited Real Estate?

Charities are often hesitant to take title to real estate. One reason for this reluctance is concern about the “carrying costs” that mount up if the property fails to sell quickly. But does a charity that unexpectedly receives a bequest of real estate have to pay property tax until it finds a buyer? In most cases, the answer is “yes.”

A recent non-bequest case illustrates the logic that supports this conclusion. In Emmanuel Worship Center v. City of Petersburg, 897 S.E.2d 265 (Va.App. 2024), the city sought tax foreclosure on church-owned property. The city did not dispute exemption for the land on which the physical church sat. The appellant asserted that the disputed property, which was adjacent to the church, was also exempt.

Charitable tax exemptions are based on a quid pro quo. The exempt organization performs a service valued by society and receives “compensation” in the form of a reduction or elimination of tax. (Churches and “charities” often receive the same benefits, the former on First Amendment grounds and the latter because of good works.)

For charities and churches alike, property tax exemptions usually only apply to real estate used exclusively to perform the relevant mission. In the Emmanuel case, the court denied exemption for the disputed property because the church (1) rented much of it to an unrelated business and (2) used the rest of it for non-worship purposes.

The outcome in the Emmanuel case would likely be the same in any jurisdiction. The underlying policy is clear. If charities held large portfolios of tax-free real estate, the revenue shortfall for municipalities would be catastrophic.

CCK COMMENT:? State and local laws grant property tax relief. The controlling Virginia statute in Emmanuel clearly exempts property used for “worship.”? While some of the church’s use of the adjacent property might have qualified as “social welfare” activity for federal income tax purposes, the Virginia real estate tax exemption is narrower. ?Property tax issues in estates require a careful analysis of the law of the controlling jurisdiction.