Taxes In South Carolina
1031 Tax Exchange
As the infamous Margaret Mitchell put it, there is never a convenient time for taxes, especially for investors who are looking to reinvest their proceeds from their sale of real property. However, with proper planning and guidance from your accountant and real estate attorney you may be able to preserve more of your assets.
If you have been thinking of selling property, you may have heard of a “1031 Tax Exchange”. The term derives from Internal Revenue Code Section 1031, which states “No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment”.
To simplify this; once you sell property the buyer’s attorney will ask you what you gain is. Now if you bought your property for $400,000 and have sold it for $450,000 your gain will roughly be $50,000, less expenses that your accountant could go into further detail with you about. I always advise clients to speak with a tax professional prior to reporting their gain in any transaction. You are subsequently taxed on this gain. This typically occurs when you go to file your taxes and your accountant so sweetly asks “Have you sold any property this year”.
However, in a 1031 Exchange, a Qualified Intermediary holds the proceeds for you to reinvest in a “like – kind” property therefore allowing investors to defer capital gain taxes as well as facilitating a return on their investment. To accomplish a successful 1031 Exchange you should first review the entire transaction with you real estate attorney and tax advisor. Then you will need to find a Qualified Intermediary. Your attorney, real estate agent, and tax advisor should have a list of good recommendations. You then enter an “assignable” contract to sell the property, and the qualified intermediary will prepare all the exchange documents for your attorney. A replacement property that you plan to purchase with the proceeds must be identified within 45 days of sale to defer capital gains taxes.
The property you plan to acquire must be like-kind, according to the IRS which is actually a broad scope. This means the property is like in nature or character. The IRS regulations state that “all real property is like-kind to all real property”. This could be a single-family rental for a mulit-family rental or industrial property for rental vacation property. The like-kind requirement does not mean selling and buying the exact same type of property. However, this excludes a taxpayer’s primary residence as Section 121 provides tax exclusion for a taxpayer’s primary residence held for two (2) of the past (5) years.
If all of the funds held by the Qualified Intermediary are used to purchase the replacement property, and all of the IRS requirements are met, the exchange is complete, and you have successfully deferred capital gains on your sale.
Primary Resident Tax & Homestead Exemption
The fall always brings new colors, pumpkins, cozy sweaters, crisp air, and if you live in South Carolina property taxes. While the county tax bills rolling out in October can be a bit scary, South Carolina does offer some property tax exemptions and special assessments that we can be thankful for this November.
First is the primary resident special assessment. If you’re primary residence is in Horry County as of January 1st of the tax year, you can be eligible for the legal resident special assessment rate which is 4% as opposed to 6%. You were probably advised of this when you purchased your property. Your tax rate will appear on your tax bill and if you’re a primary resident and being taxed at the 6% rate, you may want to apply for this special assessment. To apply you must own and occupy your residence in Horry County. In order to apply at the Horry County Assessor’s office to reduce your property tax liability you’ll need your State Issued ID or Driver’s license with your resident address, your vehicle registration, and a copy of your most recently filed federal and state tax returns.
Another possible way to reduce your property tax liability is through the Homestead Exemption. Residents, age 65 and over, or 100% disabled veterans, or total Social Security Disability, may be eligible. You must have lived in South Carolina a full year as of January 1st of your year of application. To apply for this exemption, call the Horry County Auditor’s Office.