Property Tax Post: South Carolina Expands Property Tax Protection for Vacation Rentals


South Carolina made it easier for homeowners to rent out their homes for extra income without losing the benefits of a reduced property tax assessment rate for primary residences when Governor Nikki Haley signed S.B. 437 June 9. The legislation may encourage more homeowners to rent out their primary residences part-time through websites like Airbnb.com. But those who do so will pay a price if they exceed the maximum number of days that a home can be rented under the new law.

Homeowners can now rent out their primary residences for up to 72 days each year and still maintain the 4 percent assessment rate for owner-occupied primary residences. Before this law was enacted, taxpayers would lose the reduced assessment rate if they rented out their residences for more than 15 days in one year. Residential property that does not qualify for the reduced rate is assessed at 6 percent of fair market value, the same assessment rate that applies to commercial property in South Carolina.

The legislation is aimed primarily at coastal and island homes, where homeowners complain of soaring rates for hurricane and flood insurance, according to David Slade of the Charleston Post and Courier. Homeowners in these areas often move inland during popular vacation periods and rent out their primary residences for extra income.

However, the bill itself contains no language limiting its application to beach-front properties.  Thus, any South Carolinian who wants to rent out their primary residence for more than 15 days, up to 72 days, may do so without losing the reduced assessment rate for owner-occupied homes. The bill as originally drafted allowed 100 days of rental, but was reduced to roughly the length of summer vacation, Slade notes.

Looking at two homes each valued at $200,000 will illustrate the impact of the reduced assessment rate, assuming a hypothetical mill rate of 0.1 ($100 per $1,000 of assessed value). Home A is rented out for 71 days, retains its 4 percent assessment rate, and is therefore taxed at $800 ($200,000 x .04 x 0.1).  Home B is rented out for 73 days, is assessed at 6 percent, and is therefore taxed at $1,200 ($200,000 x .06 x 0.1). 

In the example, renting out for two extra nights causes and increase of $400 in tax liability. However, depending on the actual home value and millage rate in a real-world scenario, increased rental income gained from renting out the home beyond the 72-day limit may offset any increased property tax liability that results from going over, or, a higher millage rate may make it even more imperative to stay under the 72-day limit.

The classification under the 4 percent assessment rate versus 6 percent rate has an even greater impact than that 2 percent difference alone, because only homes classified under the 4 percent rate are exempt from property taxes imposed for school operating purposes.

As an example, a taxpayer in Charleston would be subject to a millage rate of approximately 0.132 for county and municipal taxes. However, adding in the millage rate for school districts raises the combined millage rate to approximately 0.258. Thus, a home in Charleston valued at $200,000 that is rented out for 71 days and retains its 4 percent assessment rate would be taxed at around $1,050 ($200,000 x .04 x 0.132). A home next door with equal value, rented out for 73 days, would be assessed at 6 percent, taxed for school operating purposes, and would carry tax liability of $3,100 ($200,000 x .06 x 0.258).

With the growth of online travel websites like Airbnb, residential taxpayers need to be careful that they consider the impact their rentals may have on their property tax liability. Otherwise, the lure of some extra income on the side could result in a hefty tax bill if not carefully planned.

Continue the conversation on Bloomberg BNA's State Tax Group's LinkedIn page: Will the South Carolina bill encourage more people to rent out their properties for longer periods? Or were the popularity of destinations like Myrtle Beach and Charleston already enough of an incentive?

Sign up for a free trial of the Bloomberg BNA Premier State Tax Library and see a detailed discussion on state property taxes.

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