Federal and state law provide churches with numerous exemptions and exceptions to taxes of various kinds. Many tax advantages apply automatically, while others may require some paperwork. All of them come with specific rules of when and how they can be used, and church managers need to understand them to avoid putting the church’s financial wellbeing at risk. California’s church exemption from property taxes offers a good example of one of these rules.
What is the Church Exemption?
The Church Exemption is codified in Section 3(f) and Section 5 of Article XIII of the California state constitution. Section 3(f) exempts from property taxation buildings, land, and equipment that are used exclusively for religious worship. Section 5 provides that the exemption extends to buildings under construction and land and equipment associated with them, provided that the intended use would qualify such property for the exemption. A separate rule also exempts property used for parking lots that are necessary for people attending religious services.
There are several important features to the Church Exemption that are worth noting:
- The exclusive use requirement. Section 3(f)’s exclusivity requirement makes the Church Exemption a restrictive option for churches interested in using it. A church that also wants to rent out its space for non-religious functions, like meetings of community groups or renting out spaces in a parking lot, might lose its qualification for the exception.
- Filing requirements. A church must claim the Church Exemption each year by filing a form each year with the county assessor’s office. The filing must be made by February 15 each year to take full advantage of the exemption.
- The exemption applies to leased property in limited circumstances. A church that leases a parking lot or building for its religious activities and is required by its lease to pay property taxes can use the Church Exemption for that property as well, but only for churches with no more than 500 members, and provided other conditions are met.
Alternatives to the Church Exemption
The Church Exemption’s exclusivity requirement often makes it an impractical option for churches that are hoping to use their properties for non-religious purposes. California law provides other ways for churches to claim exemptions from property taxes that may be preferable:
- The religious exemption is available to a church that owns property where it conducts worship services or operates a school. This exemption has several advantages over the Church Exemption, including a one-time filing obligation.
- The welfare exemption is another avenue for a church that uses its property exclusively for religious purposes. The welfare exemption can apply to a broader range of properties than the Church Exemption, including charitable uses.
Like every aspect of tax law, these exemptions are each full of nuances. Churches should consult with tax advisors before making any major property decisions so the tax consequences can be understood before entering into a transaction. The Church Law Center of California advises churches and other nonprofit organizations. If your church has questions about how to manage its property tax liability, give us a call today. We can be reached at (949) 689-0437 or through our contact page.