Aimed primarily at new residential developments, the “builders inventory” property tax exclusion (GS 105-277.02) arrived in 2015 and is becoming more popular across the state with each passing year.  While I’ve previously blogged about the basics of this exclusion here and here, today’s post examines a few more complicated scenarios.  For more details on this exclusion, please see this bulletin.

1. Improvements Made Over Multiple Years

Assume Brenda the Builder purchases a 100-acre parcel in Carolina County in June 2023 with a 2023 tax value of $100,000.  Later in 2023, Brenda subdivides the parcel into 50 identical buildable lots, grades the property, and lays out streets.  As a result of Brenda’s improvements to the property, for 2024 taxes each of the 50 lots is now assessed at $5,000 and the total taxable value of the 100 acres is $250,000.

Brenda applies for the builders inventory exclusion for 2024 and is approved. This exclusion freezes the taxable value of the property at the assessed value for the year in which improvements are first made by the current owner to the property.  As a result, for 2024 the 100-acre property (now subdivided into 50 parcels) will be taxed at its pre-improvement value of $100,000.

When applied to residential property, the builders inventory exclusion can extend for a maximum of 3 years from when the property is first improved.  In Brenda’s case, the exclusion can apply in tax years 2024, 2025, and 2026, unless the property is first sold or removed from the market.

Although this exclusion initially required annual applications, the law was amended in 2019 to require only a single application.  Brenda does not need to reapply to have the exclusion continue for future years.

In 2024, Barbara builds identical houses on 25 of the 50 subdivided lots. The lots with houses are assessed at $200,000 each, meaning that absent any exclusion the original 100-acre parcel would now have total taxable value of $5,125,000 ($5,000,000 for the 25 lots with houses plus $125,000 for the 25 undeveloped lots).  However the exclusion continues to apply for 2025.  If no lots are sold then the total taxable value of the 100 acres will remain at $100,000 for 2025.

In 2025, Brenda builds identical houses on the remaining 25 lots, bringing the total assessed value of the original 100 acre parcel to $10,000,000 (50 lots at $200,000 per lot). But because the exclusion continues through the 2026 tax year, if no lots are sold the 100 acres will continue to be taxed at $100,000 for 2026.

The exclusion must end in 2027.  Beginning in that tax year, the 100 acres should be taxed at the full assessed value of $10,000,000.

2. Sale of Developed Lots After Subdivision

Assume the same facts as above, but that in 2025 Brenda sells one of the developed lots.  Two questions arise.

                    i. How should the remaining 49 lots be taxed for 2025 and 2026?

The sale of one or more lots in 2025 does not affect the tax treatment of the remaining lots.  They should continue to be taxed at the pre-improvement tax value for 2025 and 2026, which was $2,000 per lot ($100,000 total pre-improvement tax value allocated across the 50 subdivided lots).  As a result, in 2026 Brenda should be taxed for a total of $98,000 in assessed value (49 remaining lots times $2,000 per lot).

                    ii. How should the sold lot be taxed for 2025 and 2026?

The answer to this question depends in part on when the lot was sold.  If the lot was sold prior to July 1, 2025, then under GS 105-285(d) that property will lose its exclusion for 2025 and be taxed to the new owner at its full assessed value of $200,000.  If the lot is sold after July 1, it should retain the exclusion for 2025 and be taxed to the new owner at the reduced value of $2,000. See this post for more on the July 1 rule.

In either case, for 2026 the lot will be taxed at its full assessed value of $200,000.

3. Sale of Partially Improved Property to Different Builder

A new owner can qualify for the builders inventory exclusion for partially developed property, but only for improvements made by that party.

Assume the same facts as above but in 2025 Brenda sells the 25 undeveloped lots to Bob the Builder.

For 2025 taxes, the taxable value of the 25 sold lots depends on when they were sold.  If sold prior to July 1, then Bob loses the exclusion that Brenda was receiving for 2025 and is taxed at the full assessed value of $125,000 (25 lots at $5,000 per lot).  If sold on or after July 1, then the property retains Brenda’s exclusion and Bob is taxed at the reduced value of $50,000 (25 lots times $2,000 per lot).

For 2026, Bob should be taxed at the full assessed value at the time of his purchase; he cannot benefit from the exclusion that Brenda obtained for the improvements (subdivision and grading) that she made to those lots. Bob’s 2026 taxable value should be $125,000.

However, if Bob further improves these lots then he can benefit from a new, three-year exclusion on the increased value due to the improvements that he makes. Assume Bob builds houses on all 25 lots in 2025. If he applies for the builders inventory exclusion, then he should be taxed on the pre-improvement value of $125,000 for 2026, 2027, and 2028 despite the increase in assessed value due to the newly constructed houses.

4. County-Wide Reappraisal During the 3-Year Residential Exclusion Period

The taxable value of property receiving the builders inventory can change during the 3-year exclusion period if a county-wide reappraisal occurs.

Consider the original Brenda example above.  While receiving the exclusion, the taxable value of the 100-acre parcel was frozen at its pre-development assessed value of $100,000 for 2024, 2025, and 2026.  But assume Carolina County conducts a reappraisal effective January 1, 2026.  As a result of that reappraisal, the assessed value of Brenda’s undivided, unimproved 100-acre property would have increased from $100,000 to $150,000.  Brenda should be taxed on that new value of $150,000 for 2026.

Note that this result requires some additional work on behalf of the county, because it will be required to determine the assessed value of the 100 acres in their previous undivided, unimproved state, not in their current subdivided, improved state. The county will also need to determine the value of that property in its current subdivided, improved state when the exclusion ends in 2027 (or in 2026 for lots sold prior to July 1).