South Carolina Legislature Passes Legislation Benefiting Homeowners

Two (2) of the provisions pertain to homeowners who rent their home to others during the taxable year and a third provision pertains to residential property owned by a trust or family partnership.

Prior to the enactment of this legislation, Assessors in some counties took the position that if a taxpayer rented his or her home out for more than 14 days per year, the 4% assessment ratio was lost and the homeowner's principal residence was assessed at the 6% assessment ratio. A homeowner who lived at Pawleys Island, but rented her house during the summer when she went to the mountains, found herself at risk of losing her 4% assessment ratio.

To correct this problem, the new legislation provides that if a residence, which otherwise qualifies for the 4% assessment ratio, is not rented more than 72 days in a calendar year, then the property keeps its 4% assessment ratio. The Assessor may require a property owner to provide the Assessor with a copy of IRS Schedule E (Supplemental Statement of Income or Loss for Real Estate) to establish the limitation on rental usage.

The Internal Revenue Code, as well as the South Carolina Income Tax Act, excludes from income rents derived from the rental of a "dwelling unit" if the dwelling unit is rented less than 15 days per year. As a general rule, an accommodation tax equal to 7% of the gross proceeds derived from the rental of rooms is imposed on all taxpayers providing sleeping accommodations. An exception is made for facilities consisting of less than six (6) sleeping rooms, contained on the same premises, which is used as the "individual place of abode". The exemption did not apply to a "dwelling unit" such as a second home that is not an "individual's place of abode". The 2013 legislation now exempts "dwelling units" that are not an "individual's place of abode" from the accommodation tax.

A third, and perhaps the most important of the three 2013-2014 legislative changes, applies to a taxpayer's principal residence held in an entity such as a trust, family limited partnership, or family limited liability company. Prior to the enactment of the 2013-2014 legislation and pursuant to legislation passed in 2012, the benefit of the 4% principal residence assessment ratio was reduced if an individual owned less than a 50% fee ownership in the residence. An exception was made where an individual owned at least a 25% interest in the property with "immediate family members" (defined as a parent, child or sibling). A number of Assessors took the position that the term "immediate family members" did not include a trust of which the beneficiaries are the grantor, his/her spouse and children, or a family limited partnership or limited liability company in which the partners/members are all family members.

The 2013-2014 legislation sponsored by Senator Chip Campsen of Charleston corrects this inequity by applying the 4% assessment ratio to property otherwise qualifying for the 4% assessment ratio if the property is held exclusively by:

• the taxpayer, or the taxpayer and the taxpayer's spouse;
• a trust, if the taxpayer claiming the 4% assessment ratio is the grantor or settlor of the trust, and the only beneficiaries of the trust are the grantor or settlor and any parent, spouse, child, grandchild, or sibling of the grantor or settlor;
• a family limited partnership, if the person claiming the special 4% assessment ratio transferred the subject property to the partnership, and the only members of the partnership are the person and person's parents, spouse, children, grandchildren, or siblings;
• a family limited liability company, if the person claiming the special 4% assessment ratio transferred the subject property to the limited liability company, and the only members of the limited liability company are the person and the person's parents, spouse, children, grandchildren, or siblings; or
• any combination of the foregoing.

The 2013-2014 legislation applies to property tax years beginning after 2011 and specifically instructs Assessors to refund to taxpayers who were denied the 4% assessment ratio as a result of the 2012 legislation.

For more information about this client alert contact Scott Barnes, sbarnes@hsblawfirm.com.