July 28, 2014

New Law Nullifies Property Tax Exemption for Buildings Sold by Nonprofits

What happens to a property tax exemption when a nonprofit sells its building to an entity that will use it for a non-exempt purpose? As of July 1, 2014, and extending through 2015, the new owner will owe property tax on the property for the next 2014-pay-2015 or 2015-pay-2016 installment, regardless of the property's exempt status at the time of acquisition. This policy reverses on January 1, 2016, and the exemption will apply to the next tax bill for assessment dates starting that year, regardless of the change in ownership. Competing legislation in Indiana's 2014 legislative session created this temporary about face.

How Does an Exemption Apply for Sales in 2014 and 2015?

Consider the following example. Nonprofit owns Building A, which it uses for charitable purposes. The building has been deemed exempt for several years. On September 1, 2014, nonprofit sells Building A to a for-profit company, which intends to use the property for non-exempt commercial activities. Even though the property was exempt as of the March 1, 2014, assessment date, the for-profit company will owe tax for Building A in 2015.

How Will an Exemption Apply for Sales Starting in 2016?

Assume the same facts, except that the property is exempt as of January 1, 2016 (the new assessment date starting that year). The transfer takes place on September 1, 2016. For-profit will not owe tax for Building A in 2017.

This makes sense. Generally, for Indiana exemption purposes, how property is owned, occupied and used as of the assessment date and during the 12 months preceding the assessment date determines whether it is exempt for taxes payable the following year. The property's change of ownership or use after the assessment date should only be relevant in determining whether the property is eligible for exemption as of the next assessment date.

Earlier this year, the Indiana General Assembly passed, and the governor approved, two acts with conflicting language that created this split. The Department of Local Government Finance, the state agency overseeing property tax administration, recently summarized the result in a memorandum that explained in part:

For 2014 and 2015 ..., if a property is transferred or its use is changed so that it is no longer eligible for an exemption ..., the exemption is removed for that year's assessment date. Starting in 2016, if non-mobile home property receiving an exemption is transferred or its use changed so that it is no longer eligible for an exemption ..., the exemption will remain in place for that year's assessment date.

Nonprofit sellers should be aware of these dates in determining the parties' responsibilities for property taxes in any purchase agreement for exempt property. This may not be the final word, however. The department's memo suggests that the General Assembly may address this situation yet again in its 2015 legislative session.

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