Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.
Judge Learned Hand in Gregory v. Helvering
69 F.2d. 809, 810 (2d Cir 1934)
aff’d, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 (1935)
In his 1789 letter to Jean Baptiste Le Roy, Benjamin Franklin wrote “in this world nothing can be said to be certain, except death and taxes.” While taxes may seem unavoidable, sometimes there are completely lawful ways to reduce the taxes we pay or to eliminate them altogether. When we have such options, it is foolish not to take advantage of them.
Did you know that both North Carolina and South Carolina provide ways for homeowners’ associations to reduce or completely avoid the taxation of the property they own for the benefit of all of their members?
Homeowners’ Association Property that Qualifies
North and South Carolina property tax laws provide for special treatment of certain property owned by a homeowners’ association. While the definitions of qualifying property in the North Carolina statute and the South Carolina code differ slightly, association property qualifies for special property tax treatment in both states if:
- The property is owned by the association and is held for the use, benefit and enjoyment of all members of the association equally.
- Each member of the association has an irrevocable right to use and enjoy, on an equal basis, property owned by the association, subject to any restrictions imposed by instruments conveying the right or the rules, regulations, or bylaws of the association.
- Each irrevocable right to use and enjoy property owned by the association is appurtenant to taxable real property owned by a member of the association.
In North Carolina – Exclusion from Assessment
N.C.G.S. §105-277.8(a) provides that the value of qualifying real and personal property owned by a nonprofit homeowners’ association shall be included in the appraisals of the property owned by members of the association and shall not be assessed against the association. The statute allows the local tax assessor to allocate the value of an association’s property “among the property of the association’s members on any fair and reasonable basis.” The only exception in the statute to this exclusionary rule is for “extraterritorial common property” (property owned by the association that is “entirely contained” within a taxing jurisdiction that is different from that of the taxable real property owned by members of the association) and rarely applies.
South Carolina – An Alternate Valuation Option
S.C. Code §12-43-227 takes a different approach. It provides that the fair market value of homeowner’s association property for ad valorem (property) tax purposes is its “nonqualified earnings value” which is to be determined by the capitalization of the property’s nonqualified gross receipts. “Nonqualified gross receipts” is defined to mean gross receipts from the use of the property other than:
- amounts received as membership dues, fees or assessments from the members of the homeowners’ association; and
- amounts received from the developer of the property owned by the homeowners’ association as reported on the most recently filed application submitted pursuant to S.C. Code §12-43-230.
Most property owned by a homeowners’ association produces little or no nonqualified gross receipts. If an association’s property produces zero or de minimus nonqualified gross receipts, this special valuation provision cannot result in the property being valued at a rate less than $500.00 an acre. While this minimum acreage value prevents South Carolina associations from avoiding property taxes entirely, they can still substantially reduce their property tax bill.
The Catch – Filing a Timely Application
In North Carolina, a homeowners association is entitled to the benefit of the statutory exclusion only if an application is filed before the end of the listing period for the year in which the association seeks the benefit of the exclusion. If the application is not filed before the end of the listing period, the association will not be eligible for the benefit of the exclusion until the following tax year and then only if an application is filed prior to the end of the listing period for that year. Once an application has been filed and approved, however, the association does not need to file an application in subsequent years unless new or additional property is acquired or there has been a change in the eligibility of the property for the exclusion. N.C.G.S. §105-282.1(a)
In South Carolina, the association or its agent must make a written application for the special valuation allowed on or before the first penalty date for taxes due for the first tax year in which the special valuation is claimed. That application may be with respect to one or any number of tracts or parcels owned by the association. The application must be made to the assessor of the county in which the special valuation property is located and must be on forms provided by the county and approved by the Department of Revenue which include the reporting of nonqualified gross receipts. If the application is not filed before the first penalty date, the association waives its right to the special valuation for that year. Once a proper application is timely filed, however, no additional annual filing is required while the property remains homeowners association property and the ownership remains the same, unless the nonqualified gross receipts for the most recent completed tax year either (i) exceed the amount of nonqualified gross receipts with respect to the property reported on the most recently filed application by ten percent (10%) or more or (ii) are less than ninety percent (90%) of the amount of nonqualified gross receipts with respect to the property reported on the most recently filed application. In those cases, the association or its agent must make additional written applications with respect to the property and the report the change in nonqualified gross receipts. S.C. Code §12-43-230(d)
The end of the tax year is approaching. Don’t pay taxes you don’t have to! Be sure that an application has been filed with the tax assessor for your county for all of your association’s qualifying property. If an application has not been previously filed, do it now. Time is quickly running out to file an application for special tax treatment in 2018. Verify the filing deadline with your county tax assessor. They are NOT all the same.
If you need help determining the tax status of your association’s property or with filing an appropriate application, give us a call … very soon!
Please contact Timothy G. Sellers if you have any questions about this post.