Some – but not all – nonprofit organizations in Texas may enjoy exemption from certain of the omnipotent and ubiquitous tax regimes. Indeed, the property tax exemption opportunity for Texas nonprofit organizations is the second most important asset the organization can harness, next to an exemption from federal income tax.
Generally speaking, Texas property tax exemption hinges on two things: ownership and use.
Who owns the property and how it is used is critical to obtaining a favorable exemption from Texas property tax. However, not all charitable organizations in Texas are allowed an exemption from property tax assessed on real or tangible property used by the organization to advance its charitable, religious, or educational purposes.
Rather, a Texas nonprofit organization must meet specific organizational and operational requirements to enjoy a property tax exemption under the charitable organizations property tax exemption statute, Section 11.18 of the Texas Tax Code.
Let’s take a look at the statute.
Section 11.18 of the Texas Tax Code
This exemption statute sets forth a complex but precise regime for affording a property tax exemption to property owned by qualified charitable organizations.
Under Section 11.18, a qualified charitable organization is entitled to an exemption from taxation of the buildings and tangible personal property that are owned by the organization and, except as permitted by Subsection 11.18(b), are used exclusively by qualified charitable organizations.
Under Subsection 11.18(b), “[u]se of exempt property by persons who are not charitable organizations qualified as provided by this section does not result in the loss of an exemption authorized by this section if the use is incidental to use by qualified charitable organizations and limited to activities that benefit the beneficiaries of the charitable organizations that own or use the property.” (emphasis added).
To qualify as a charitable organization under Section 11.18, the organization must meet the applicable requirements of Subsections (d), (e), (f), and (g).
So, lets see what little Subsections (d), (e), (f), and (g) require.
Requirement Subsection 11.18(d). Under Subsection (d), the organization must be organized exclusively to perform religious, charitable, scientific, literary, or educational purposes and, except as permitted by Subsections (h) and (l), engage exclusively in performing one or more of the twenty-six charitable functions listed in Subsections (d)(1) through (d)(26).
So, the first question to ask is whether the organization that owns the property (1) has articles of organization that appropriately limit its purposes and (2) exists “exclusively” to perform one or more of the functions listed in Subsections (d)(1) through (d)(26).
For the sake of brevity, I will omit here the 26-item laundry list contained in Subsections (d)(1) through (d)(26), but the organization must “fit” within one or more of them, and modifications to articles of organization may be warranted to better slide into scope of the exemption allowed by Section 11.18.
- Subsection (h) provides that “[p]erformance of noncharitable functions by a charitable organization that owns or uses exempt property does not result in loss of an exemption authorized by this section if those other functions are incidental to the organization’s charitable functions.”
- Subsection (l) provides that “[a] charitable organization described by Subsection (d)(3) that provides support to elderly persons must engage primarily in performing charitable functions described by Subsection (d)(3), but may engage in other activities that support or are related to its charitable functions.”
Requirement Subsection 11.8(e). Under Subsection (e), the organization must be operated in a way that does not result in accrual of distributable profits, realization of private gain resulting from payment of compensation in excess of a reasonable allowance for salary or other compensation for services rendered, or realization of any other form of private gain and, if the organization performs one or more of the charitable functions specified by Subsection (d) other than a function specified by Subdivision (1), (2), (8), (9), (12), (16), or (18), be organized as a nonprofit corporation.
Requirement Subsection 11.18(g). Applies to an organization that performs the functions in subsection 11.18(d)(15), which regards the function of providing the organized solicitation and collection for distributions through gifts, grants, and agreements to nonprofit charitable, education, religious, and youth organizations that provide direct human, health, and welfare services.
Requirement Subsection 11.18(f). Under Subsection (f) of Section 11.18, the organization must:
- use its assets in performing the organization’s charitable functions or the charitable functions of another charitable organization; and
- by charter, bylaw, or other regulation direct that on discontinuance of the organization by dissolution or otherwise, the assets are to be transferred to an instrument of government or an organization that is qualified as a charitable organization under Section 501(c)(3) of the Internal Revenue Code.
Indeed, the property tax exemption opportunity for Texas nonprofit organizations is likely the second most important asset the organization can harness, next to an exemption from federal income tax.
Ownership and qualified use are most critical.
Oh, and PS – an exemption from property tax is not automatic. The organization must apply for and receive a favorable ruling from the local appraisal district. Unfortunately, appraisal districts across the Lone Star State are not necessarily uniform in their application of the law to facts relative to the exemption. Thus, an applying organization is wise to make the strongest argument for the exemption, which will likely require submission of well-structured governing documents and other evidence to prove that, in fact and under law, the Texas organization is indeed entitled to the privilege of exemption from property tax in the State of Texas.
