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April 19, 2024

Leasehold Real Estate Taxes for Dummies –

By John Kraft & Kirk Allen

On March 16, 2022

Shelby County, IL. (ECWd) –

The Property Tax Code is clear: Leaseholders are responsible for paying the real estate taxes on property they lease from an entity (local government) that is otherwise tax-exempt.

We covered real estate taxes on exempted property in a previous article (here).

See Shelby County State’s Attorney’s comment during a recent legislative hearing on leasing of county-owned farm ground. See top of page 6 of this document (here).

However, when we mentioned leaseholders paying taxes in the most recent county board meeting, the State’s Attorney replied by saying since the previous leases were not properly written, the county was obligated to pay the real estate taxes on the farm.

Watch the video:

We believe she is wrong on that point, here is why:

The constitution is clear in Article VIII, Section 1, when it states that:

  • Public funds, property or credit shall only be used for public purposes
  • . . . units of local government . . . shall incur obligations for payment or make payments from public funds only as authorized by law or ordinance

We find no provision in any law or ordinance authorizing Shelby County, or any county, to incur the obligation to pay the real estate taxes of public property leased to others. Never mind the lack of authority to lease farmland, this article focuses on real estate taxes.

The Illinois Department of Revenue has consistently issued determinations stating leaseholds of exempt (public) property are taxable when there is no public purpose related to the leasehold.

Illinois is also a Dillon’s Rule state, which means that local governments must possess the powers to do whatever they plan on doing, and when coupled with the constitutional restrictions on the use of public funds, there are no powers for a county to pay these real estate taxes.

Some may say if it is written into the lease a county could pay them, which is an argument for another day since no provision for Shelby County to pay these taxes were in the past leases. Compare the counties code and property tax code, with no express or implied permission granted for a county to pay real estate taxes on leased property, to the property tax code where there is implied permission for a municipality to pay, unless it is written into the contract (here).

What happens if neither the leaseholder nor the county pays the real estate taxes?

We know the property cannot be sold (at a tax sale) for nonpayment of taxes; “no tax lien shall attach to the exempt real estate” (the real estate remains exempt, it is the leasehold on the exempt real estate that is not exempt), and we believe the State’s Attorney or public entity levying the taxes would be responsible for filing a civil suit against the leaseholder to force his payment of the taxes due.

Sec 9-195 of the Illinois Property Tax Code:

Sec. 9-195. Leasing of exempt property.
(a) Except as provided in Sections 15-35, 15-55, 15-60, 15-100, 15-103, 15-160, and 15-185, when property which is exempt from taxation is leased to another whose property is not exempt, and the leasing of which does not make the property taxable, the leasehold estate and the appurtenances shall be listed as the property of the lessee thereof, or his or her assignee. Taxes on that property shall be collected in the same manner as on property that is not exempt, and the lessee shall be liable for those taxesHowever, no tax lien shall attach to the exempt real estate. The changes made by Public Act 90-562 and by Public Act 91-513 are declaratory of existing law and shall not be construed as a new enactment. The changes made by Public Acts 88-221 and 88-420 that are incorporated into this Section by Public Act 88-670 are declarative of existing law and are not a new enactment.


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1 Comment
  • Homer
    Posted at 03:42h, 17 March

    What is the tax amount the farmer should have paid on the Shelby county farm ground