The religious exemption created by G.S. 105-278.3 may produce more difficult questions than the rest of the Machinery Act combined.  This post summarizes the religious exemption’s legal requirements and tries to answer some of those thorny eligibility questions.

Ownership and Use Requirements

As I discussed in this post, most property tax exemptions other than the one for government property require that the property be owned by an eligible taxpayer AND used for an exempt purpose.  This is true of the religious exemption, as G.S. 105-278.3 requires that the property be owned by a religious organization and used for religious purposes.

Type of Owner

Owners eligible for the religious exemption include “a congregation, parish, mission, or similar local unit of a church or religious body” as well as “a conference, association, presbytery, diocese, district, synod, or similar unit comprising local units of a church or religious body.”  In other words, the property must be owned by a religious entity; ownership by a pastor or imam or rabbi  or any other individual would not be sufficient.

Leased Property

Property leased by a religious organization from another owner does not qualify, even if the owner allows the religious organization to use the property for free or nominal rent.  However, property that is owned by a religious organization that makes the property available “gratuitously” (i.e., for free) to another entity for religious, charitable, or non-profit uses can qualify.

For example, if the Church of the Benevolent Blue Devil conducts its religious services in a building owned by Coach K, that building is taxable even if Coach K does not charge the Church rent.  But if the Church owns a building and allows Meals on Wheels to use it free of charge for its charitable activities, that building can be exempt under the religious exemption even though the Church is not using the property itself.

Religious Use

In addition to being owned by a religious organization, the property must be “wholly and exclusively used by its owner for religious purposes” or (as discussed above) made available to another party for free and used by that party for religious, charitable, or other non-profit purposes.

As the statute explains, worship is not the only type of religious use that can qualify for the exemption.  Qualifying activities can be “anything that demonstrate and further the beliefs and objectives of a given church or religious body.” This definition is flexible enough to cover a wide variety activities that at first glance might not seem overtly religious.

For example, housing can qualify for the exemption, but only if it is provided for (i) clergy and (ii) employees who provide security or custodial services. If a church were to offer housing for other employees or congregation members, or guests, the portion of the property used for that housing should be taxable even if the church made the housing available for free or minimal rent.

Outdoor activities can qualify land for the religious exemption even if they do not involve worship. Our courts have held that the use of land for “church camp,” for church youth group recreational activities, and for Boy and Girl Scout activities qualified for the exemption. See In re: Worley, In re: Mount Sheperd Methodist Camp, and In re: Southview Presbyterian Church.

But what about religious organizations that blend the commercial activities with their spiritual work?  Should church property used as weekday café and coworking site be exempt? How about property used to support a church’s extensive retail offerings?

It’s clear that any portion of a property owned by a religious organization that is used for purely commercial activity should be taxable.  But it may not be easy to draw a bright line between commercial and religious activity.  A church might run a café to recruit new members and provide a space for existing members to form social bonds important for the health of the congregation; if so, that church might have a reasonable argument to extend the religious property tax exemption to its café.

Remember that it is the use of the property that determines its eligibility for an exemption, not the use of the proceeds from that property.  For example, assume that a religious organization owns a small strip mall across the street from its sanctuary. The organization rents out the strip mall to various commercial tenants and uses all of the proceeds from that strip mall to fund its religious activities.  Should that strip mall be exempt?  No, because the religious organization is using that property for a non-religious purpose (in this case, use as a commercial landlord).  It is irrelevant how the proceeds from that non-religious activity are used.

Unused Land & “Buffer Zones”

Land not being used for any purpose fails the use requirement and should be taxable. But courts have extended the exemption to cover vacant land relied upon as a “buffer zone” against neighboring industrial development “to protect the sanctity and serenity” of that religious organization’s activities.  See In re: Worley.

Courts have not provided a bright-line rule for exactly how much land can be exempted under the “buffer zone” concept, but there are limits. In one case, a court rejected an effort by a religious educational organization to exempt over 1,300 acres of land in western North Carolina and instead limited the exemption to a buffer zone of just 100 acres.  See In re: The Masters Mission.

Construction in Progress

For decades, it was not clear whether land on which religious buildings were under construction satisfied the use requirement for the religious exemption. In 2015, the Court of Appeals said no, religious buildings under construction were not eligible for the religious exemption because they were not yet being used for religious purposes. See In re: Vienna Baptist Church.  The General Assembly reacted quickly and later that year amended G.S. 105-278.3 to expressly include in the exemption property that is under construction and will be used for religious purposes when completed.  Subsection (g)(3) explains how long this “under construction” exemption may apply: “ 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.”

Given a recent Court of Appeals decision involving solar electricity farms, it is likely that property under construction satisfies the use requirement for all exemptions and exclusions.  See this blog post for more details.

Applications

The religious exemption is one of the many that under GS 105-282.1 requires only a single application. Once a property receives the exemption, it should continue to be exempt unless and until the property suffers a change in use, ownership, or physical condition (substantial renovation or expansion).  A new application would then be required after such a change for the property to continue to receive the exemption.

For example, assume that a synagogue has long received the exemption for the parcel of land on which its sanctuary and offices sit.  If the synagogue purchases the adjoining parcel in 2022 and immediately begins to use the buildings on that parcel for religious activities, the synagogue would need to submit a new exemption application in 2023 in order for the newly purchased parcel to be exempt.

The deadline for applications is the end of the listing period, but GS 105-282.1 permits the board of county commissioners to accept late applications “for good cause” up until the end of the calendar year. As a result, religious exemption applications for the 2023-24 tax year may be accepted for “good cause” up until December 31, 2023.  “Good cause” can be whatever the board desires.

Real Property Purchased and Sold by Religious Organizations

The “July 1” rule discussed in this blog post applies to the religious exemption.  If a religious organization sells exempt real property to a taxable owner between January 1 and June 30, that property will be taxable to the new owner for the coming tax year.  But if a religious organization purchases real property from a taxable owner after January 1, the property will be taxable to that organization for the coming tax year.

For example, assume the Church of the Benevolent Blue Devil owns Parcel A, which has long been exempt.  If the Church sells parcel A to Tina Tar Heel in February of 2023, that parcel will be taxable to Tina for 2023 because it was sold to her prior to July 1.

Assume also that the Church purchases Parcel B from Wanda Wolfpack in March of 2023.  Because Parcel B was owned by a taxable owner as of January 1, 2023, Parcel B will be taxable to the Church for 2023 even if the Church immediately begins using it for religious purposes.  The first year that Parcel B could be exempt in the hands of the Church would be 2024 (assuming the Church files a timely exemption application).