Real estate tax exemptions in Illinois: A primer

Introduction

The subject of real estate tax exemptions has been in the news lately, particularly the property of hospitals which were not previously required to pay real estate taxes. The issue, whether hospitals are truly charitable and therefore exempt from real estate taxes, was just recently before our Illinois Supreme Court. They remanded the case for the determination of a penultimate issue, before reviewing and deciding the dispositive issue. This caused me, as a practitioner exclusively in the ad valorem real estate field, to realize that this area of real estate taxation is not one with which most attorneys are familiar. I’m pretty sure this area, in fact real estate taxation generally, is not taught in our Illinois law schools. For that reason, we offer here a very basic primer for the Illinois State Bar Association Senior Lawyers Section Council newsletter on the subject of real estate tax exemptions in Illinois.

In general, all real property in Illinois is taxable and subject to assessment by local assessing authorities. Exceptions to this general principle are made for certain categories of property which qualify for property tax exemption. Certain entities are eligible for property tax exemptions under Illinois law, such as charitable, religious, educational and governmental entities. While these organizations initially submit exemption applications with their local County Boards of Review (“Board of Review”), it is the Illinois Department of Revenue (“IDOR”) which ultimately approves and monitors such exemptions on a case-by-case basis. Following is a basic overview on property tax exemptions, in particular exemptions based on charitable, religious, educational and governmental ownership and/or use.

Charitable Ownership & Use

Pursuant to the Property Tax Code, in order for a charitable organization to qualify for a property tax exemption, it must demonstrate that the property is both (1) owned by a charitable organization; and (2) that it is exclusively used for charitable purposes (35 ILCS 200/15-65(a)). The burden of proof is on the applicant and both prongs have to be met in order to succeed in an application for property tax exemption. Many organizations assume that they should be exempt from property taxes simply because of their federal tax-exempt status, and that assumption is mistaken. Charitable status granted by another governmental body, for example 501 (c)(3) status, is not in itself determinative.

Once the organization passes the charitable ownership prong, it then must demonstrate the property is exclusively used for charitable purposes and not leased or otherwise used with a view to profit. In analyzing charitable use, Illinois courts look to six characteristics, to be applied on a case-by-case basis, in determining whether a property is used for a charitable purpose. These characteristics were set forth in the Illinois case of Methodist Old Peoples Home v. Korzen, 39 Ill. 2d 149 (1968). The following ‘Korzen factors’ are not by themselves determinative, but they are a guide that local Boards of Review and the IDOR look to when analyzing exemption applications submitted by charitable organizations:

(1) The organization bestows benefits on an indefinite number of people for their general welfare, or the benefits in some way reduce the burden on the government;

(2) The organization has no capital, capital stock or shareholders, and earns no profits or dividends;

(3) The organization derives its funds mainly from public and private charity and holds them in trust for the objects;

(4) The organization dispenses charity to all who need and apply for it;

(5) The organization does not appear to place any obstacles in the way of people seeking the charitable benefits; and

(6) The exclusive, primary use of the property is for charitable purposes.

Religious Use

The Property Tax Code provides that property used exclusively for religious purposes will qualify for exemption as long as it is not used with a view to profit (35 ILCS 200/15-40(a)). In this context, the term “exclusively” refers to the primary purpose for which the property is used. This section of the Property Tax Code applies to property owned by religious institutions and used in furtherance of the religious institutions’ functions or services, including churches, religious schools, orphanages, convents and, in applicable situations, housing facilities for religious officials and their families (35 ILCS 200/15-40(b)).

If property used for religious purposes is determined to be operating with a view to profit, that use destroys any eligibility for property tax exemption. For example, if a property owner intends to earn a profit resulting from its religious activities, or by leasing the property, then that property is not eligible for property tax exemption.

Educational Purposes

Schools that own and use property exclusively for “educational” purposes and not leased or otherwise used with a view to profit are also eligible for property tax exemption pursuant to the Property Tax Code (35 ILCS 200/15-35). In defining “school,” the Illinois Supreme Court stated that two qualities are necessary to qualify a private institution for property tax exemption as a school. First, a course of study needs to exist which fits into the general scheme of education funded by the State and supported by public taxation. Second, there needs to be a course of study which substantially lessens what would otherwise be a governmental function and obligation. Coyne Electrical School v. Paschen, 12 Ill. 2d 387 (1957).

Property owned by schools incidental to the operation of the school is also considered exempt under this statute, including but not limited to student residence halls, dormitories, and other housing facilities for students and their spouses and children. Additionally exempt are staff housing facilities and school-owned and operated dormitory or residence halls occupied in part or entirely by students belonging to fraternities, sororities or other campus organizations (35 ILCS 200/15-35(b)).

Governmental Ownership

The Property Tax Code states that “all property of the United States is exempt, except such property as the United States has permitted or may permit to be taxed” (35 ILCS 200/15-50). In other words, United States property is exempt from state and local taxation under the Supremacy Clause of Article 6 of the United States Constitution, which generally prohibits state taxation or regulation that would impair or interfere with a federal instrumentality (IICLE, Real Estate Taxation, Section IV(A)(I)(I .33) United States Property (2016)). Additionally, the Property Tax Code provides that all property belonging to the State of Illinois is exempt (35 ILCS 200/15-55).

Exemption Application Process

Once you know what type of organization you are representing and the exact category of real estate tax exemption your client is seeking, the application is filed through an administrative filing process. The application process begins with filing an application with your local County Board of Review containing all of the required materials. The application is then reviewed by the Board of Review and a recommendation is made to the IDOR as to whether the property should be granted property tax exemption. The IDOR does not need to follow the Board of Review’ s recommendation and conducts its own analysis of the application. If the application and accompanying documentation sufficiently establish the applicant organization’s qualification for exemption, it should be approved. However, if the application is denied by the IDOR, the applicant organization must proceed with administrative appeal and, potentially, a subsequent court appeal.

Once a real estate tax exemption is successfully obtained, exempt organizations must file annual affidavits with their local County Assessor’s offices by a specific deadline in order for their exemptions to continue. The exempt ownership and use of the property must remain unchanged.

Conclusion

The reader is asked to please recognize that this article is just a primer on the subject of real estate tax exemptions in Illinois. Obviously, there are very complicated issues that can arise. For example, a church that may be exempt could lease out its parking lot for profit to a restaurant in the area for parking in the evening, or perhaps its basement for profit for after-school care, or weekend bingo. This begs the question: what happens to the exemption — should they lose it, either partially or completely? Of course, other questions in all the areas of exemption from real estate taxes could arise. The goal of this article is to provide the reader with a basic understanding. 

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Leonard F. Amari is a partner in the ad valorem real estate tax firm of Amari & Locallo and a member of the Illinois State Bar Association Senior Lawyers Section

Vesna Marusic is a Senior Associate in the ad valorem real estate tax firm of Amari & Locallo and a member of the Illinois State Bar Association.