In the course of my reporting on population growth and development in South Carolina, I regularly encounter residents who have large and potentially costly misconceptions about how property taxes work.
In particular, people worry they'll be taxed out of homes they own if property values rise (they won't be).
And many people think that property taxes paid by homeowners fund the operations of public schools (they don't) and that renters don't pay property taxes (they pay more than homeowners, indirectly).
Much of this is due to a lack of awareness about sweeping changes to South Carolina property tax laws that went into effect more than a decade ago under Act 388. That's the 2007 law that exempted owner-occupied homes from paying for the operations of public schools, raised the state's sales tax to make up for that property tax reduction, and protected homeowners from large tax increases when their property values are reassessed.
Property taxes can be quite complicated, but here are some key points South Carolina homeowners and potential buyers need to know:
- If property values are rising fast all around a home you own and occupy, that doesn't mean your taxes will increase. In fact, the faster property values increase, the more likely it is that your tax bill will go down.
I often hear people, including public officials, talk about the need to protect people from "being taxed out of their homes" in communities where property values are quickly rising. I heard that most recently just last week, while writing about efforts to revitalize North Charleston's south end.
It's not surprising that people have that fear, because that is how taxes used to work in South Carolina. These days, renters face a very real threat of being displaced as communities change, but not owner-occupants.
Counties in South Carolina are supposed to revalue (reassess) property every five years, to assure that property owners are taxed appropriately. Reassessment is a redistribution of the tax burden, generally raising tax bills for properties that had above-average gains in value, and reducing bills for those that lagged behind.
Under the old rules, if property values were soaring in a community, tax bills there would soar following reassessment. Since 2007, because of Act 388, the taxable value of an owner-occupied home can't be raised more than 15 percent during a reassessment.
If most properties gain more than 15 percent in value over five years, which wouldn't be surprising, the ones capped at a 15 percent increase would most likely get a tax reduction — not an increase — following reassessment.
- If you buy a house, don't assume the property tax bill will be similar to the prior owner's last bill.
Under Act 388, when a home changes hands — an "assessable transfer of interest" — that triggers a reset of the taxable value. So, the prior owner may have been enjoying a capped assessment, but the buyer is going to be taxed on the property's true value, initially. Then, the new owner gets a capped assessment going forward, until the property is sold again.
For those who don't know the rules, the reset of a property's tax value after a sale can be a big surprise. So, home buyers should never look at the current taxes on a property and assume that's what they will be paying.
- The tax bill for a rented property is significantly higher than the bill of an identical owner-occupied property.
If someone moves out of a home they own and occupied, and decides to rent it out, the tax bill should about triple in most cases. In 2014, an exception was created for members of the armed forces, who can apply with the county assessor to keep the preferential owner-occupied rate for up to two years.
So why would the tax bill triple for a rental property? Owner-occupied properties are assessed at 4 percent of their value, while rental and commercial properties are assessed at 6 percent, so wouldn't it be a 50 percent increase?
Here's why. Owner-occupied homes are exempt from public school operating taxes (but not taxes for public school debt). Rental properties are not — they are both taxed on 50 percent more of their actual value, and are subject to school operating taxes, which are traditionally the largest portion of a property tax bill.