Income Tax Exemptions vs. Property Tax Exemptions

Published for Coates' Canons on July 28, 2023.

Different tax systems play by different rules.  Just because an organization is exempt from paying federal or state income taxes does not automatically mean that organization will be exempt from paying local property taxes on its land, buildings, cars, and personal property.

26 USC 501 exempts a wide variety of non-profit organizations from federal income taxes.  The most well known of these exemptions are those created by subsection 501(c)(3) for charitable, religious, scientific, and educational organizations like Habitat for Humanity, the American Cancer Society, private colleges, and churches, synagogues, and mosques.  Many taxpayers are familiar with 501(c)(3) organizations because donations to them can usually be deducted from their income for state and federal tax purposes.  (But as always, don’t take income tax advice from me. Consult with a qualified accountant or attorney before deducting any contributions on your tax returns.)

A boatload more federal income tax exemptions for non-profits are found in subsections 501(c)(4) through (c)(29).  Perhaps most prominent are those created by 501(c)(4) for politically active non-profits such as the American Civil Liberties Union or the National Rifle Association and those created by 501(c)(6) for business promotion groups such as local chambers of commerce, the American Dental Association, or the National Association of Realtors.  Unlike 501(c)(3) organizations, (c)(4) and (c)(6) organizations generally do not benefit from tax-deductible donations.

North Carolina law makes any organization that is exempt from federal income taxes also exempt from state income taxes. GS 105-130.11.  But the same is not true for local property taxes. An organization that is exempt from federal and state income taxes still might have to pay local property taxes.

As I explain in this post, for property to be exempt from property taxes in North Carolina it must be both (i) owned by a qualified taxpayer and (ii) used for an exempt purpose (except for government property, which is exempt regardless of how it is used).  Taxpayers will be expected to prove that they satisfy both requirements as part of the application process.  See this blog post for more about exemption applications.

Ownership: The universe of property owners that can qualify for property tax exemptions has much overlap with the universe of 501(c)(3) organizations.  Charitable, religious, educational, scientific, and literary organizations all can qualify for both federal income tax exemptions and North Carolina property tax exemptions.

But that’s not true for most 501(c)(4) and (c)(6) organizations.  North Carolina law does not exempt from property taxes politically active non-profits or business-promotion groups unless they are also engaged in charitable or educational activities.  As a result, most 501(c)(4) and (c)(6) organizations will be liable for property taxes in North Carolina.

Evidence that a property owner is a 501(c)(3) organization is helpful to demonstrating that the owner should be eligible for a property tax exemption, but it is neither required nor sufficient.  Regardless of a taxpayer’s federal income tax status, it still must prove to the county that it is engaged in charitable, educational, religious, or other exempt activities here in North Carolina.

While it is usually easy to determine whether an organization is educational or religious, determining what constitutes a charitable organization is more subjective and sometimes controversial.  Read more about that issue here and here and here.

Use: it is not enough that property is simply owned by a charitable, religious, educational or other potentially exempt organization for it to be exempt from property taxes. The property must also be used for an exempt charitable, religious, educational, or other exempt purpose.

Consider my favorite ACC member, Duke University. It is an educational institution that qualifies for federal and state income tax exemptions under 501(c)(3) and an educational exemption from property taxes under G.S. 105-278.4.  Duke’s dorms, classrooms, dining halls, and even Cameron Indoor Stadium (Go Devils!) are exempt from property taxes because they are used for educational purposes (broadly defined to include activities reasonably necessary for or related to education, including athletics). But Duke University also owns the Washington Duke Inn, an on-campus upscale hotel open to the public.  Because that property is used for a commercial purpose rather than an educational purpose, it is not exempt from property taxes even though it is owned by a 501(c)(3) educational non-profit.

The bottom line: organizations that are exempt from federal and state income taxes are not always exempt from local property taxes.  Regardless of their IRS status, non-governmental organizations must satisfy both ownership and use requirements to earn property tax exemptions in North Carolina.

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Topics - Local and State Government