Tax Type
Local Taxes
Property Tax
Description
Status of Tax Exempt Real Property Leased for Profit
Topic
Exemptions
Local Power to Tax
Local Taxes Discussion
Property Subject to Tax
Date Issued
12-31-1987
[Opinion - Virginia Attorney General: 1987 at 601]
REQUEST BY: Honorable William N. Bracey Commissioner of the Revenue for Mecklenburg County P.O. Box 360 Boydton, Virginia 23917
OPINION BY: Mary Sue Terry, Attorney General
OPINION:
You ask two questions concerning the tax-exempt status of certain property in your county. You first ask whether real estate owned by a landlord loses its tax-exempt status pursuant to § 58.1-3603 when it becomes a source of revenue or profit. If the property remains exempt, you next ask whether the leasehold interest may be taxable to the tenant pursuant to § 58.1-3203.
I. Facts
The Chase City Medical Clinic, Inc., (the "clinic") was formed in 1975 to recruit physicians to practice in Mecklenburg County and was granted exemption from property taxation by designation of the 1987 General Assembly, pursuant to § 58.1-3650.266. See Ch. 275, 1987 Va. Acts 356. The clinic had previously purchased land and constructed a building which it has leased for consideration to the Chase City Medical Group, a group of three medical doctors who are conducting their private practices in the building.
II. Applicable Statutes
Section 58.1-3650, which provides for exemption from taxation by legislative designation, states:
A. The real and personal property of an organization designated by a section within this article and used by such organization exclusively for a religious, charitable, patriotic, historical, benevolent, cultural or public park and playground purpose as set forth in article X, § 6(a)(6) of the Constitution of Virginia, the particular purpose for which such organization is classified being specifically set forth within each section, shall be exempt from taxation so long as such organization is operated not for profit and the property so exempt is used in accordance with the purpose for which the organization is classified.
B. Exemptions of property from taxation under this article shall be strictly construed in accordance with the provisions of Article X, § 6(f) of the Constitution of Virginia. [Emphasis added.]
The designation of the clinic as a charitable organization is subject to the limitation that the property must be used "exclusively for charitable purposes, on a nonprofit basis." See § 58.1-3650.266.
Section 58.1-3603(A) states that exemptions are not applicable when a building is a source of revenue or profit. It further states, in pertinent part, that:
whenever any building or land, or part thereof, exempt from taxation pursuant to this chapter and not belonging to the Commonwealth is leased or is otherwise a source of revenue or profit, all of such buildings and land shall be liable to taxation as other land and buildings in the same county, city or town.
Section 58.1-3203 provides for the taxation of certain leasehold interests. The first paragraph of § 58.1-3203 provides:
All leasehold interests in real property which is exempt from assessment for taxation from the owner shall be assessed for local taxation to the lessee. If the remaining term of the lease is fifty years or more, or the lease permits the lessee to acquire the real property for a nominal sum at the completion of the term, such leasehold interest shall be assessed as if the lessee were the owner. Otherwise, such assessment shall be reduced two percent for each year that the remainder of such term is less than fifty years; however, no such assessment shall be reduced more than eighty-five percent. If the lessee has a right to renew without the consent of the lessor, the term of such lease shall be the sum of the original lease term plus all such renewal terms.
III. Applicability of § 58.1-3603 Is Factual Determination
A tax exemption granted by designation of the General Assembly under § 58.1-3650 is limited by § 58.1-3603. The latter statute applies if the property exempted is leased or otherwise becomes a source of revenue or profit. Prior Opinions of this Office conclude that a building becomes a source of revenue or profit only if the owner derives a substantial net profit from a lease or use after deducting from gross income all proper expenses. See Att'y Gen. Ann. Reps.: 1975-1976 at 339, 340; 1973-1974 at 399. See also Norfolk v. Nansemond Supervisors, 168 Va. 606, 192 S.E. 588 (1937).
Leasing real property does not automatically subject the tax-exempt owner to taxation. The leased property is taxable to the landlord only if the rental results in a substantial net profit, which is a question of fact to be resolved by the commissioner of the revenue. See 1975-1976 Att'y Gen. Ann. Rep. 339, 340.
IV. Leasehold Interest Taxable to Tenant if Owner of Property Is Tax-Exempt
If the commissioner of the revenue makes a factual determination that the owner of the property is exempt from taxation, then the leasehold interest is taxable1 to the tenant pursuant to § 58.1-3203. See 1975-1976 Att'y Gen. Ann. Rep. 339, 340. The terms of the specific lease will determine whether all or only a portion of the assessed value will be taxable to the tenant.
V. Owner Liable for Property Taxes if Substantial Net Profit Derived from Lease; Otherwise Tenant Liable for Tax on Leasehold Interest
Based on the above, it is my opinion that real property may lose its tax -exempt status to the owner if a substantial net profit is derived from a lease on the property. This is a factual determination to be made by the commissioner of the revenue on a case-by-case basis. If the commissioner determines that there is a substantial net profit, the owner is liable for the local property tax. If he determines that the revenues or profits have not resulted in a substantial net profit, and the owner of the property, therefore, continues to be exempt from taxation, then the tenant is liable for local taxation on all or a portion of the leasehold interest depending upon the terms of the lease.
Attorney General's Opinion