When Is Real Property Exempt From Property Taxes?

Originally published First Quarter 2005

Any individual or entity that owns real property is well aware of the tax implications of property ownership. While property ownership does afford significant benefits to the owner, with those benefits comes the seemingly inevitable responsibility of paying property taxes. The old adage that one cannot avoid taxes generally applies in the context of property taxes as well as all other kinds of taxes. In Illinois, virtually all properties are subject to the assessment, levy and collection of property taxes. However, Illinois law does allow certain properties the opportunity to legally avoid the burden of property taxes.

Significantly, Illinois statutory law recognizes several exceptions to the general rule that all properties are subject to taxation. Under Illinois law, properties used for certain specified purposes are deemed exempt from property taxes. Property taxes are generally assessed based on the valuation and characteristics of the property itself. Therefore, the determination of tax exempt status is similarly contingent upon the nature and use of the property. These exemptions are numerous and varied and, at first glance, may appear to have nothing in common. However, there is in fact a common bond between all of the available exemptions. In order to qualify for tax exempt status, a property generally must be used for some beneficial public purpose and, further, must not be used with a "view to profit." In other words, exempt status is available only to those properties which are used for certain beneficial purposes and in a manner not intended to generate profit or income. Importantly, statutory language conferring tax exempt status on certain properties must be strictly interpreted and, if any doubt exists as to whether the subject property is calculated to produce a profit, the doubt will be resolved in favor of taxation and against exemption.

In Illinois, property may be construed as exempt from taxation in a variety of circumstances. For example, Illinois statutory law provides that property used exclusively for religious purposes is exempt from property taxes. This exemption broadly applies to all properties owned by religious institutions and used for the performance of religious functions or services, including churches, religious schools, orphanages, convents, and, in some instances, housing facilities for religious officials and their families. Significantly, this exemption does not apply where the property is used with a "view to profit." In other words, the exemption is not available where the owner of the property intends to derive a profit from the use of the property, such as income generated by leasing all or part of the property to a third party. For example, one Illinois court held that, where a church leased its adjacent parking lot to a third party with the intent to derive income from the lease, the parking lot property was not exempt from taxes, despite the fact that it was owned by a religious organization, because the parking lot property was used with a "view to profit."

Similarly, certain properties owned by charitable organizations and used exclusively for charitable or altruistic purposes are exempt from property taxes in Illinois, provided they are not used with a "view to profit." This exemption encompasses a broad spectrum of charitable and beneficent uses, including public charities, properties used for the redistribution of donated goods, free public libraries, and facilities dedicated to the care and well-being of the elderly and developmentally disabled. Under this exemption, a hospital or health care facility may qualify for tax exempt status if it is structured as a nonprofit entity and is not calculated to derive a profit. Other organizations that fit within the parameters of this exemption include museums, historical societies, research facilities and social organizations devoted to charitable objectives. Once again, this exemption is premised on the notion that any use, charitable or otherwise, employed for the purpose of generating a profit, will render the property ineligible for the statutory exemption.

The foregoing exemptions are significant and perhaps most commonly used, but are by no means an exhaustive list of all exemptions. In fact, there are a host of lesser known exemptions which may be advantageous as well. Among some of the legally recognized exemptions are burial or cemetery property; agricultural societies; military academies; public transit agencies; municipally owned natural gas facilities; school districts; public water and drainage works; forest preserves; and property owned by veterans’ organizations and used exclusively for the promotion and performance of charitable, civic, or patriotic activities. Additionally, numerous exemptions exist which may benefit municipalities and other governmental entities. Examples of such exemptions include property owned by a municipal corporation and used for the furtherance of municipal or public purposes; property owned by a county, village, or city and used exclusively for the maintenance of the poor and impoverished; property owned by a county, village, city, or other taxing district and designated for future expansion or development by the taxing district (unless such property is leased to an individual or entity for non-public purposes); government-owned public buildings and underlying land; all property owned by the United States federal government; and all property owned by the state in which the property is located. Notably, in order to utilize these exemptions, it is imperative that the property not be used with a "view to profit."

One important exemption which has garnered significant attention recently is reserved for schools and other educational institutions. Illinois law affords tax exempt status to all properties used exclusively for schooling and educational purposes, provided the school or underlying school property is not intended to produce a profit. Educational institutions at all levels may benefit from this exemption, including secondary schools, universities, community colleges, and even academic research and professional societies. Under the relevant statutory provision, all properties used primarily for schools and the advancement of educational objectives are exempt from property taxes. In addition, several Illinois cases have held that properties used for purposes incidental to the operation of a school are also exempt if the use is essential and necessary to carry out educational objectives. For example, student housing facilities, dormitories, and school-owned campus organizations, such as fraternity and sorority residences, have been recognized as exempt from taxes based on the premise that such uses are crucial to the maintenance and operation of schools. Conversely, the school exemption is generally unavailable where education is purely a secondary use of the property or where the property is only partially used for educational purposes. For example, an Illinois court held that a bar association’s headquarters was subject to taxation despite its affiliation with legal educational institutions because the headquarters was used primarily as a meeting place for bar association functions and the legal educational services provided at the property were secondary.

Private schools and educational institutions may qualify for exempt status if the school offers a course of study which fits within the guidelines of the general scheme of education established by the state and, further, if the educational services offered by the private school substantially decrease the tax burden to the public by providing educational training that would otherwise be the obligation of the government.

Regardless of whether the school is publicly or privately owned, school property is not exempt from property taxes if the property is generating revenue, even if the revenue is wholly allocated toward educational purposes. Several Illinois cases have unequivocally held that school-owned property used to derive profit from rents, tuitions, fees or any other sources is not exempt from property taxes despite the fact that all monies derived from the property were paid directly to an educational fund or otherwise used for the advancement of educational purposes. Despite the seemingly clear statutory language, the taxation of school property remains a controversial issue, especially with respect to the determination of whether the school is being used with a "view to profit."

An Illinois appellate court recently decided the issue of whether properties used with a "view to profit," even if used for educational purposes, are entitled to tax exemption under the Property Tax Code (Swank v. The Department of Revenue). The property owners in Swank owned and operated a business college (the college) on the property, and the college was authorized to grant associate degrees, was accredited by the Accredited Council of Independent Colleges, was certified by and registered with the Illinois State Board of Higher Education and the Illinois State Board of Education, and provided a number of scholastic programs and courses of study. All expenses incurred in the ordinary course of the college’s business, including all property taxes, were paid from an account which the college funded with its tuition revenues. The real property was owned by a land trust and private individuals were the sole beneficiaries of that land trust. The beneficiaries of the land trust were also the sole shareholders and directors of the for-profit corporation which operated the college on the property. The college applied for tax exemption status on the grounds that its real property was used for educational purposes and the court held that, even though the property was used for educational purposes, the property was not entitled to property tax exemption status because the property was used with a "view to profit."

In holding that the college’s property was not exempt from property taxes, the court first looked at the general rule that all real property is subject to taxation unless specifically exempted by statute and that all debatable questions should be resolved in favor of taxation. Then, the court reviewed the specific Illinois statutory provision which addresses tax exemptions for schools (35 ILCS 200/5-35), and which provides:

"All property donated by the United States for school purposes, and all property of schools, not sold or leased or otherwise used with a ‘view to profit,’ is exempt, whether owned by a resident or a non-resident of Illinois or by a corporation incorporated in any state of the United States. Also exempt is:

1. property of schools which is leased to a municipality to be used for municipal purposes on a not-for-profit basis;
2. property of schools on which schools are located and any other property of schools used by the schools exclusively for school purposes, including, but not limited to, student resident halls, dormitories and other housing facilities for students and their spouses and children, staff housing facilities, and school-owned and operated dormitory or residence halls occupied in whole or in part by students who belong to fraternities, sororities, or other campus organizations;
3. property donated, granted, received or used for public school, college, theological seminary, university, or other educational purposes, whether held in trust or absolutely."

The court was asked to interpret whether the "view to profit" standard applied to properties falling within the parameters of Section 15-35 (c) of the Property Tax Code and concluded that any property used with a "view to profit," even if used for education purposes, is excluded from the Section 15-35 tax exemption. In reaching its conclusion, it was necessary for the court to determine (i) whether the property was used for educational purposes, and (ii) whether the property was used with a "view to profit." Based upon the facts presented, it was clear that the property was used for education purposes. However, it was equally clear that the college was created for a profit by the individuals that created the for-profit entity. As a result, it did not meet the second criterion above because the property was used with a "view to profit." In declining to extend tax exemption status to properties held for profit, even if they are used for educational purposes, the court stated that the intended beneficiaries of a Section 15-35 tax exemption are not private individuals that hold title to property which is used by a for-profit corporation to operate a school, but rather not-for-profit entities that operate the property for educational purposes.

In conclusion, while it is true that all real property located in Illinois is subject to taxation in Illinois, there are a number of exemptions under which a property owner can apply for tax exemption status. However, it is important to remember that the exemptions are narrowly construed in favor of taxation and that the utilization of property with a "view to profit" can prohibit a property owner from obtaining tax exemption status, even if that property would otherwise fall within the criteria for exemption, such as an educational use. With the proper guidance, property owners can apply for, and obtain, tax exemption status, for those properties falling within a recognized exception to the general rule of taxation.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.