(Residential) Real Estate Property Taxes: 101
I get more questions about (residential) real estate property taxes than any other subject or issue in a real estate closing – so here is your introduction to understanding residential real estate property taxes (often referenced as the “4% exemption”). (Assume for the purposes of this article that we are in Charleston County).
In South Carolina, real property is taxed based on how it is used – at either the 4% assessment rate (for property used as one’s primary residence) or at the 6% assessment rate (other real estate, such as that used for investment/rental property or a second home/vacation condo). South Carolina law allows taxpayers who own and live in real property as their primary (owner-occupied) legal residence to apply for this 4% exemption. (The “exemption” refers to an exemption from school operating millage on residential property). Here, property taxes are paid annually, in arrears; meaning, the tax bills are issued at the end of the year (usually October) covering the entire calendar year January 1 through December 31.
Generally, every time a deed is recorded with the county, the county puts the assessment rate for that property back up to 6%. After closing, the new owner must apply (and be approved) for the 4% exemption. In Charleston County, the assessment rate is based on how the property was used or assessed as of January 1 of that year (if the property was used as rental/investment property on January 1 of the calendar year, and therefore assessed at the 6% rate, the tax bill that comes out in October will be issued at the 6% assessment rate – unless a new owner applies for and is approved for the 4% exemption). Here are some examples:
Example 1: 6% seller to 4% buyer
Jane is buying a new house and plans to close in June and live in it with her family as her primary, owner occupied residence. The seller of the house has been using the property as a rental property, so the county assesses the property at the 6% rate. After Jane closes the house in June, Jane must apply (ideally before October but certainly by the end of the calendar year) to the county for the 4% exemption. If she doesn’t, the county will issue the tax bill in October at the 6% rate and she will have to contribute more to property taxes than she would have if she had applied for the 4%.
It’s important to know that the difference of “only 2%” may seem nominal, but it is actually significant. I recently closed a property that was taxed at 6% (the tax bill at 6% was $1,783.71), and after closing the buyer applied for and was approved for the 4% exemption (the bill at 4% was $670.87). That’s a $1,112.84 difference between being taxed at 6% vs. 4%.
Example 2: 4% seller to 4% buyer or 6% buyer
Jane is buying a new house and plans to use it as a rental/investment property and plans to close in June. The seller of the house lives in it as his primary residence, so the county assesses the property at the 4% rate. After Jane closes the house in June, the deed will be recorded and the county will adjust the assessment rate back to the 6%. **But** , in Charleston County, because the tax bills are issued in October based on how the property was assessed on January 1 of that year, the tax bill for the property Jane bought in June will be issued at the 4% assessment rate – she will get the benefit (only for that calendar year) of the seller’s 4% assessment rate. (Beginning January 1 of the next year, however, the property will be assessed at the 6% rate, for as long as she uses it as a rental/investment property).
A few other caveats worth noting, that I will discuss in more detail in a future post:
- If you fail to apply for the 4% legal residence exemption but would have been entitled to the exemption (resulting in an overpayment of property taxes on property that was legally eligible for the 4% exemption), you can apply for a “refund” (which still requires you to establish that the property was in fact your legal, primary residence for the year in question), for up to two years.
- If you apply for the 4% legal residence exemption and your application is denied, there is a process by which you can appeal.
- The 4% legal residence exemption is unrelated to the Homestead Exemption (a separate exemption program for homeowners who are 65 and older, totally and permanently disabled, or legally blind). This exemption excludes the first $50,000 of the value of the home for purposes of calculating property taxes.
I could write for several more hours about all of the different questions, issues, caveats, other exemptions, procedures, etc. on residential property taxes – but I will save that discussion for the next post: Property Taxes 102.