Michael Mosher
Inspired Partnerships
Amazing Space, Volume 4, Number 2, page 4 Spring 1998

More and more religious organizations in Illinois are using their property for multiple programs including non-religious, charitable or educational activities that can adversely affect the tax-exempt status of the property. Some congregations use their property for non-exempt purposes, such as housing a custodian or a commercial activity. All tax-exempt organizations that own and operate tax-exempt property, must be very careful when using property for purposes not disclosed in their original tax exemption application. Congregations can and should be very creative in the use of their worship facility. However, such creative use may be detrimental to the economic welfare of the congregation, if not handled properly.

These alternative uses can generally be described in two categories: (1) non-religious charitable programs conducted by the congregation to generate revenue or to provide a needed community service; and (2) space sharing arrangements with separate entities such as Head Start programs, etc., to conduct social programs not supervised by the congregation. In the latter category, such leases or space sharing agreements are usually intended to generate income for the congregation and provide invaluable community services. In many cases, the congregation needs this additional revenue to maintain a facility that may be to large for the congregation’s needs and/or capacity. In all cases involving alternative uses of tax-exempt property, it is important for the owner/ congregation to carefully document the space sharing arrangement in a manner that will not jeopardize the tax-exempt status of the property.

The Illinois statues that authorize tax-exempt treatment for religious facilities require that the property not be “used or leased with a view to profit.” This phrase has not been well-defined in Illinois. Often the Illinois Department of Revenue uses the existence of profitable revenue from such activities to end tax-exempt status because the property appears to be used for-profit. With careful planning by the congregation, the appearance of profit can be avoided, or reduced, by accurately describing non-religious activities as a function of the congregation’s ministry.

However, the most careful planning cannot change the character of non-exempt activities. The congregation that anticipates alternative uses should consult with professional counsel to determine if the new activity could jeopardize their tax-exempt status. When the main reason for the alternative use is to generate funds, the congregation must think like a commercial landlord and include property taxes as part of the cost of doing business. The Illinois Department of revenue will permit a partial non-exempt use of such a property without affecting the remaining qualified property. It is very important to inform the county tax assessor when non-exempt uses are anticipated for religious property.

Space sharing and alternative uses need not jeopardize the congregation’s tax-exempt status. The revenue exchanged in the sharing of space must be described as a shared cost of maintaining a facility, rather than as rent. Effective space sharing agreements involving two or more religious or charitable organizations are complicated and should be prepared by experienced counsel.