Property tax exemption

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The California Legislature has the authority to exempt property used exclusively for religious, hospital, charitable or scientific purposes, and owned or held in trust by nonprofit organizations operating for those purposes. This exemption is known as the Welfare Exemption.

In general, the Welfare Exemption from local property taxes is available for property of organizations:

  • Formed and operated exclusively for qualifying purposes (religious, scientific, hospital, or charitable),
  • That use their property exclusively for those qualifying purposes, and
  • That have a current tax exempt letter from the Internal Revenue Service or the Franchise Tax Board.

Who decides if we get the exemption?

  • Board of Equalization determines if the organization qualifies.
  • A county assessor determines if the specific property qualifies based on the property's use.

California law further requires the organization’s start-up (formation) documents to contain a statement that the organization’s property is irrevocably dedicated to one or more of the above qualifying purposes, and that in the event the organization stops operating, that the assets will be transferred to another fund, foundation, or corporation organized and operated for similar purposes

Under the Welfare Exemption, an organization’s primary operating purpose must be religious, hospital, scientific, or charitable. A qualifying organization’s property may be exempted fully or partially from property taxes, depending on how much of the property is used for a qualifying purpose and activity.

The term charitable includes all kinds of humanitarian activities for the care of the physical and mental well-being of the recipients. An organization’s activities are charitable, and may qualify for the Welfare Exemption, when they benefit the community as a whole or an unspecified portion of the community. The term charitable is not confined to the relief of poverty.

The courts have broadly defined charitable to include some educational purposes and activities. However, not every educational purpose and activity is exempt. Charitable purposes include certain educational purposes and activities subject to the following requirements:

  • The educational purposes and activities must benefit the community as a whole or an unspecified portion of the community.
  • The educational activities include the study of relevant information and the distribution of that information to the general public

A scientific foundation or institution claiming exemption for its real and personal property used for scientific purposes must must be chartered by the U.S. Congress.

Claims for the Welfare Exemption must be filed annually with the county assessor in the county in which the organization’s property is located or being used.

It might seem like the dissolution clause could be a problem for the investors. But that need not be the case. Here is an example of an acceptable dissolution clause:

"Upon the dissolution or winding up of the corporation, its assets remaining after payment, or provision for payment, of all debts and liabilities of this corporation shall be distributed to a nonprofit fund, foundation, or corporation which is organized and operated exclusively for charitable purposes and which has established its tax exempt status under section 501(c)(3) of the Internal Revenue Code."

Acceptable dedication example:

"The property owned by this organization is irrevocably dedicated to charitable and educational purposes meeting the requirements of Revenue and Taxation Code section 214."

Note that if the dedication had stated "... dedicated to charitable, scientific and educational purposes ..." then it probably wouldn't have been acceptable unless our organization was a scientific organization chartered by U.S. Congress.

Sources: