Second home tax bite widening

In coastal Beaufort County, where the beach vacation business drives the economy, most homes used to be classified for tax purposes as second homes.

Then state lawmakers passed Act 388 and exempted primary residences from taxes related to public school operations. Second homes weren't given the same advantage.

That made for a much bigger difference in how primary residences, on the one hand, and second homes, on the other, are treated for tax purposes.

And it gave owners of second homes a stronger incentive to have their properties - or the most expensive of two they own in South Carolina - reclassified as primary residences. All they have to do is fill out a declaration form at the county assessor's office.

Since Act 388 took effect three years ago, the percentage of homes classified as primary residences in Beaufort County has risen from 25 percent to 40 percent, according to Phyllis White, the school district's chief financial officer.

White said she doesn't know exactly how much property tax revenue the school system has lost from the rush to a lower tax category, but she figures Act 388 is behind the dramatic change.

"We're getting squeezed," she said.

A new analysis by a Clemson University researcher shows why Act 388 could be the culprit.

The difference in property tax bills between the two kinds of residential property used to be 50 percent.

Now it's 141 percent in Beaufort County, 138 percent in Greenville and 133 percent in Clemson for properties with the same value, according to the study by Ellen Saltzman, research associate at the Strom Thurmond Institute for Government and Public Affairs.

In the city of Greenville, the annual tax bill for a $100,000 home is $776 if it's classified as a primary residence and $1,849 if it's classified as a second home, according to Saltzman's analysis.

For a $1 million home, the bill is $7,756 if it's classified as a primary residence and $18,486 if it's classified as a second home.

The differences in tax bills ranged from 119 percent to 165 percent in 10 other South Carolina counties Saltzman examined. The percentage varies depending on how much of the tax bill is attributable to school operations.

Jay Nexsen, president of Greenwood Communities and Resorts, which has developed luxury real estate communities across the Southeast, including Palmetto Dunes on Hilton Head Island and The Reserve in Pickens County, said a luxury home owner can save more than $10,000 a year through reclassification.

"I think it's happened on the coast for years," he said.

Nexsen said he thinks the wider tax differential resulting from Act 388 has hurt sales of luxury real estate because buyers these days carefully weigh not only a home's sale price, but every cost involved in owning the home - from insurance to clubhouse fees to property taxes.

"I think that all our buyers are getting much more sophisticated than they used to be," Nexsen said.

Saltzman also found the difference in tax bills between owner-occupied homes and second and rental homes is much wider in South Carolina than in four other Southeastern states she studied - Georgia, North Carolina, Tennessee, and Virginia.

In another unintended consequence of Act 388, real estate brokers say the law's 15 percent cap on property reassessments has been killing property deals because the cap comes off when a property is sold and the resulting higher tax bill scares away potential buyers.

State lawmakers last year created a special commission to come up with ideas for overhauling tax law, but took a re-write of Act 388 off the table.

State Rep. Dan Cooper of Piedmont, chairman of the tax-writing Ways and Means Committee, said changing property taxes is "like pushing on a balloon. When you push on one spot, it just expands in another direction. The only way to reduce a balloon is to let some air out, so the only way to reduce property taxes overall is to cut expenditures. Local governments haven't done much of this."