North Carolina's Exemption for Real Property Used for Religious Purposes

Through 105-278.3, North Carolina recognizes an exemption from property taxation for "buildings, the land they actually occupy, and additional adjacent land reasonably necessary for the convenient use of any such buildings" if and only if the property is owned by a church or religious body AND either

1.      wholly and exclusively used by its owner for religious purposes; or

2.      occupied gratuitously by a third party and wholly and exclusively used by that party for religious, charitable, or nonprofit educational, literary, scientific, or cultural purposes.

105-278.3(e), (f), and (g) provide some flexibility to an otherwise strict statute. Portions of property may qualify for the exemption, so it is not all or nothing. Incidental availability of the building or facilities to the general public will not lead to disqualification. And a parking lot may be exempt even if it is used for parking not related to a qualifying use, so long as the charge for said use is not more than the actual maintenance expenditures for the lot.

Until June 2, 2015, the most recent substantive North Carolina Court of Appeals decision concerning 105-278.3 was the 2003 decision, Church of Yahshua, which held that a property with no buildings could not qualify for the exemption. On June 2, 2015, the Court issued Vienna Baptist Church, through which it considered a related question: Can the exemption apply where there are partially-constructed buildings but no certificate of occupancy?  

In 2002, Vienna Baptist Church bought 28.5 acres of vacant land. In 2011, it began construction of a church building. As of January 1, 2012, the building was only half completed with no certificate of occupancy, meaning that it was not yet legal for the Church to occupy the building. After Forsyth County denied the Church's application for exemption for the tax year 2012, the Church appealed to the North Carolina Property Tax Commission. The Commission held that the Church failed the "whole and exclusive use" requirement, because it was forbidden by law from using the building at all until the certificate of occupancy issued. Since the exemption determination for the tax year 2012 was based on the facts as they existed on January 1, 2012, the Church could not qualify.

The Church appealed to the Court of Appeals, which upheld the Commission's decision and rejected the Church's argument. In doing so, the Court focused not on whether there was or was not a building on the property as of January 1, 2012, but instead on whether whatever structure existed was being used wholly and exclusively for a qualified purpose. Like the Commission, the Court concluded that the Church could not possibly meet the use requirement on January 1, 2012, before a certificate of occupancy was issued, since a building cannot legally be used or occupied until the certificate of occupancy issues.

Effective October 1, 2015, Session Law 2015-185, changed that by adding the following new exception to the exemption's "whole and exclusive use" requirement:

A building and the land occupied by the building is exempt from taxation if it is under construction and intended to be wholly and exclusively used by its owner for religious purposes upon completion. For purposes of this subdivision, a building is under construction starting when a building permit is issued and ending at the earlier of (i) 90 days after a certificate of occupancy is issued or (ii) 180 days after the end of active construction.

The new exception leaves intact the Court's ruling from Yahshua, but renders Vienna moot - mostly. Note that 105-278.3 exempts from taxation buildings wholly and exclusively used by their owners for religious purposes OR occupied gratuitously by a third party and wholly and exclusively used by that third party for religious, charitable, or nonprofit educational, literary, scientific or cultural purposes. The new exemption speaks only to buildings that will be wholly and exclusively used by their owners for religious purposes. What about those buildings that will be gratuitously occupied by a third party and used for religious, charitable, or nonprofit educational, literary, scientific or cultural purposes? Presumably, the rule from Vienna will still apply to those buildings, for now.

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Justin Hardy

Justin M. Hardy

Justin focuses his practice on property tax appeals, intellectual property law, tax controversy law, and general business law.  He is a regular contributor to both The North Carolina Property Tax Law Monitor and The Trademarketing Blog.  You can follow him on Twitter @JustinHardyBDP.
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