For years home builders have been pushing to exempt their real property inventory from property taxes in the same fashion that personal property inventory held by traditional merchants and manufacturers is exempt under G.S. 105-275(32a), (33) and (34).

Home builders got their wish, sort of, for a few years.  In 2010 the General Assembly created a deferral for taxes attributable to the construction of new, unsold residential homes.  That deferral “sunsetted” (in other words, disappeared) as of 2013.

But now it’s back and stronger than ever thanks to  S.L. 2015-223 .  Instead of deferring taxes, S.L. 2015-223 excludes them entirely. And the new law covers non-structural improvements and commercial properties, neither of which fell within the scope of the old deferral. The exclusion will be codified at GS 105-277.02.

Below is a summary of the new law.  For more details, please see this bulletin.

Residential Property:

S.L. 2015-223 excludes from taxation the increase in property value attributable to:

1. subdivision of a parcel for future residential construction;
2. non-structural improvements (grading, streets, utilities, etc.) for future residential construction; and,
3. construction of a new single-family home or duplex.

To be eligible, the property must continue to be owned by a builder, must not be occupied by a tenant, and must not be used as a model home or for any other commercial purposes.  Because the exclusion is aimed at new construction, renovations to an existing residence cannot qualify.

The exclusion is limited to three years from the date the improved (or partially improved) property was first listed by the builder.  Improvements, in this context, include any action taken by the owner that would have increased its taxable absent an exclusion.

For example, assume a builder buys a parcel in 2016 and immediately subdivides it and lays out streets.  Those improvements might cause an increase in the property’s tax appraisal for 2017.  If so, the builder could apply for the new exclusion to avoid taxation for 3 years (2017, 2018, 2019) on the increased value due to those improvements.  If the builder builds houses on the newly subdivided lots in 2017, the increase in taxable value for 2018 due to those improvements would be covered by the exclusion and the property would continue to be taxed at its undeveloped 2016 value. The exclusion would continue until whichever comes first, the property being sold or the tax year 2020.  If the property is not sold, for 2020 the property would be assessed on its full taxable value as of January 1, 2020.

A builder must submit a single application under the general application provisions in G.S. 105-282.1.  (Originally the exclusion required annual applications but that changed in 2019.) The deadline for applications under that statute is the end of the listing period (usually January 31), but late applications may be accepted for “good cause” up to the close of the calendar year.   Each local government is free to define “good cause” as it deems appropriate, which means some local governments may be more lenient with late applications than others.

The new residential property exclusion differs in some important ways from the old deferral for homebuilders’ inventory.  First and most importantly, the taxes attributable to the improvements are not just deferred, they are waived entirely.  Second, it covers activities in anticipation of residential construction (the subdivision of a parcel and grading, streets, utility work, etc.), not just the actual construction.  Third, a certificate of occupancy need not be issued for the exclusion to apply to a new residential structure. Even partially completed structures can qualify for the exclusion.  Fourth, the exclusion probably does not apply to condominium or townhouse buildings that will house more than two families.  The bill extends the exclusion to “single family residence or a duplex,” which suggests that structures housing three or more family units will not qualify.

Commercial Property:

Unlike residential property, commercial property may benefit from the new exclusion for a maximum of five years rather than three.  But the commercial property exclusion covers only the increase in value attributable to subdivision or non-structural improvements (grading, streets, utilities).  Any improvement that requires the issuance of a building permit terminates eligibility for the exclusion.

In some respects, this new commercial real property exclusion is an extension of the relatively new “site infrastructure” deferral that was intended to encourage land owners to prepare farmland for industrial or manufacturing development.  From what I’ve heard, very few (if any) developers have taken advantage of that deferral; it’s likely more will be interested in this new exclusion.

This table summarizes the new exclusions available for improvements to residential and commercial property.