The start of a new year often includes new or updated statutes, and South Carolina is no exception. 2021 brings an update to South Carolina reversal tax laws, with potentially significant implications for real estate transactions where reversal taxes may come into play.
What are reversal taxes?
Section 12-43-220 of the South Carolina Code requires that whenever a property changes from receiving the benefit of a property tax exemption from a special agricultural assessment fee for any other use, reversal taxes must be applied. assessed and charged to the property. The amount of reversal taxes is equal to the sum of the differences, if any, between taxes paid or payable based on fair market value for agricultural purposes and taxes that would have been paid or payable if the property had been assessed, valued and taxed as other real estate for the current year and each of the 3 immediately preceding fiscal years. Essentially, there is the potential for additional property taxes due to reclassification of use.
What qualifies as “Agricultural use”?
“Agricultural Property” means “any area of real estate that is used to raise, harvest or store crops, feed, raise or manage livestock, or to produce plants, trees, birds or animals useful to man, including the preparation of products raised for the use of man and eliminated by marketing or other means. It includes, but is not limited to, such real estate properties used for agriculture, pasture, horticulture, forestry, dairy and mariculture. In the event that at least fifty percent of an area of property qualifies as “agricultural property”, the entire area will be classified in this way, provided that no other for-profit business is being operated on it. ”Section 12-43-230 (a) of the South Carolina Code.
When do reversion taxes apply most often?
Typically, reversion taxes apply to transactions in which a developer is acquiring property for development that previously received the benefit of a special assessment index property tax exemption for agricultural use.
Who pays the reversal tax?
In South Carolina, there is no rule whether the buyer or seller pays the reversal tax. If the parties involved (and their attorneys) are aware of this problem in advance, the payment of reversal taxes is usually negotiated prior to the execution of the contract. The applicable South Carolina County will not distribute reversion taxes between buyers and sellers. The county appraiser, however, will automatically apply reversion taxes to any property where the buyer has not applied to continue a special assessment fee property tax exemption for agricultural use.
What are the recent changes in South Carolina reversal tax laws?
From January 1, 2021, reversal taxes will be assessed over a three-year period, instead of the previous five-year period. Buyers and sellers will now need to estimate the amounts of the applicable reversion tax for the three years prior to the change in use of the property, instead of five years under the previous law. This is advantageous for buyers of reclassified properties with a potential two-year reversal tax savings.
What is the reversal tax estimate formula?
- Start with the current market value of the property in question
- Multiply the market value by 0.06
- Find the current assessed value of the property in question
- Calculate the difference of Line 2 and Line 3
- Multiply this resulting difference by the Grinding Rate, for each of the three (3) fiscal years being reversed.
Observation: Reversion tax estimates must be calculated for three (3) years. Start with the year in which the use of the property changed and calculate based on the previous three (3) years.
Is there a way to avoid reversion taxes?
South Carolina law allows charging a Fee In Lieu instead of standard property taxes in some specific circumstances, which are widely applicable to commercial projects. While the specifics of each project must be considered, an investment of $ 2.5 million is usually required to qualify for the In Lieu Fee. We recommend that you seek the advice of an accountant and / or lawyer to determine if Fee In Lieu is available.
Where can I get advice on my potential property purchase / sale?
In addition to consulting an accountant, your foreclosure attorney should be able to obtain from the county appraiser an estimate of the reversal tax payment that would be required.
[View source.]