Dude: Where’s My Tax Exemption?

Many nonprofit housing developers challenged with rising operating costs wonder why their properties are not exempt from real estate taxes. I want to explain why this is so and what developers can do about it. This will be the first of three parts about taxes– why you owe them (even though you are a nonprofit) and what you might do to reduce that expense.


So: why do nonprofit housing developers have to pay real estate taxes on projects developed to serve low

Homeowner Tax Concept

Homeowner Tax Concept

income families and seniors? On the face of it, this does not make a lot of sense. Major health care nonprofits and religious organizations do not pay taxes on their real estate. It seems unfair that nonprofit housing developers– whose work is mission driven– must pay taxes on the projects they develop. The answer to this puzzle lies in the language of the Massachusetts tax exemption statute, G.L. c. 59, §5(a), Clause Third. The statute provides:

The following property shall be exempt from taxation . . . :

Third, . . . real estate owned by or held in trust for a charitable organization and occupied by it or its officers for the purposes for which it is organized . . . . .

One problem for nonprofit housing developers has been the “occupancy” requirement: the property must be occupied by the charity or its officers. Neither rental housing nor housing developed for home ownership meet this requirement, though ironically, if a nonprofit owns its own administrative offices, those offices would be exempt from taxation.

Another problem that sometimes confronts a nonprofit developer using low income housing tax credits as a source of development capital can be the form of the entity owning the real estate. In order to qualify for the charitable exemption from real estate taxation, the owner of the property (the taxpayer) must be a corporation. Limited liability companies and partnerships do not qualify for the exemption.

Next up: is there a way for a small project to reduce its real estate tax liability?