Every year bills are filed with the North Carolina General Assembly to expand the reach of our state’s three residential property tax relief programs, the elderly/disabled homestead exclusion (GS 105-277.1), the circuit breaker exclusion (GS 105-277.1B), and the disabled veteran’s exclusion (GS 105-277.1C). I’ve written about potential modifications to the circuit breaker here. None of these proposals has passed in recent years, in part because some local governments were concerned about the impact of broader tax exclusions on their tax bases.
Earlier this month another property bill aimed at expanding property tax relief was filed, but this one has the support of the NC Association of County Commissioners and tax officials from across the state. It might have better odds to become law than previous efforts.
In a nutshell, Senate Bill 2025-349 would increase the income eligibility level for property tax relief for married couples, allow one co-owner of a property to participate in the circuit breaker even if the other co-owners did not, and, most importantly, eliminate taxes in excess of the circuit breaker tax cap rather than defer them.
Combined, these changes would likely make the circuit breaker much more popular. In many counties, only a handful of taxpayers currently take advantage of this relief program due to the circuit breaker’s age and income restrictions as well as its creation of deferred tax liens.
An expanded circuit breaker without deferred tax liens could be particularly helpful for lower-income, long-time residents of areas experiencing substantial gentrification. By capping their annual tax bills at a percentage of their incomes, the circuit breaker effectively shields these taxpayers from future property value increases. That’s not true under the elderly/disabled homestead exclusion; while that program reduces the taxable value of homes by 50%, the taxpayers’ bills will still climb along with property values.
In the absence of an expanded circuit breaker, some NC local governments have implemented their own tax relief programs to help taxpayers experiencing gentrification pressure. As I discuss here, the legal justifications for these programs are untested. An expansion of the circuit breaker would rest on much more solid legal ground.
Here are more details about the impact of Senate Bill 2025-349.
- Reduce the “marriage penalty” by raising the income eligibility levels for married taxpayers.
Since the creation of the elderly/disabled homestead exclusion some 50 years ago, critics have argued that it created a “marriage penalty” by requiring that the income of both spouses be considered when determining a married couple’s eligibility for the exclusion while not combining incomes for unmarried co-owners. See this blog post for more details on how the homestead exclusion is calculated for co-owners under current law.
Senate Bill 2025-349 would address this concern by raising the income eligibility limit for married couples to 115% of the limit for other owners. Married couples who reside together would still be required to combine their income for eligibility purposes, but that limit would be 15% higher than under existing law.
For 2024, the income eligibility limit for the elderly/disabled homestead exclusion was $36,700; it increases each year based on the percentage increase for Social Security benefits. If Senate Bill 2025-349 had been in effect for the 2024 tax year, married couples could jointly earn up to 115% of the $36,700 limit, which comes to $42,205. The result would be that married couples could earn roughly $5,500 more than the “regular” income limit and still qualify for the exclusion.
This income limit change is relatively simple when applied to the elderly/disabled homestead exclusion. But it also applies to the circuit breaker exclusion, and that situation is a bit more complicated.
First, a quick explainer about the circuit breaker. Unlike the elderly/disabled exclusion, the circuit breaker does not reduce the property’s taxable value. Instead, the circuit breaker caps the property taxes due each year based on the taxpayer’s income from the prior calendar year.
If the taxpayer’s income is at or below the income eligibility level for the elderly/disabled homestead exclusion, then the circuit breaker caps the property taxes due for the current year at 4% of the taxpayer’s income. If the taxpayer’s income is between 100% and 150% of the income eligibility level for the elderly/disabled homestead exclusion, then the circuit breaker caps the property taxes at 5% of the taxpayer’s income.
Any excess taxes over those caps are deferred, with the most recent three years of deferred taxes due and payable when the property is transferred or no longer used as the taxpayer’s legal residence. (But see #3 below; the deferral would be eliminated if Senate Bill 2025-349 passes.)
The circuit breaker’s varying income limits make it a bit more complicated to apply Senate Bill 2025-349’s new “joint income eligibility limit” of 115% of the “regular” income limit. I think the result would be that the 4% cap would apply to married taxpayers who earn up to 115% of the “regular” income limit and the 5% cap would apply to married taxpayers who earn between 115% and 172.5% of the “regular” income limit. Why 172.5%? Because that is 115% of the previous 150% limit under existing law.
Note that the increased income limit for married couples would have no effect on the disabled veterans exclusion because that program does not contain an income restriction.
2. Allow one co-owner to participate in the circuit breaker exclusion even if other co-owners do not.
Under current law, all co-owners who reside on the property must participate in the circuit breaker exclusion or none of them may do so. This is not the rule for the other two residential property tax relief programs; co-owners may mix and match participation in the elderly/disabled homestead exclusion and the disabled veterans exclusion.
I think that the “all-or-none” rule exists for the circuit breaker due to the unique nature of this exclusion as compared to the other two property tax relief programs. As explained above, the circuit breaker caps taxes based on a percentage of taxpayer income instead of simply reducing the property’s taxable value.
Calculating the tax liability when one co-owner is subject to the circuit breaker tax cap and others are not may require separate bills for each owner. Today, tax offices generally do not send multiple bills to co-owners of real property. Instead, the tax office simply calculates the tax owed including any exemptions and exclusions, sends the bill to one of the co-owners, and lets the co-owners figure out who pays what portion of the bill.
That said, this situation is not likely to arise often, meaning any additional burden on tax offices will be minimal. Here’s an example:
Assume a property has two owners, A and B, both of whom reside on the property. Without any exclusions, the total tax bill on the property would be $5,000. Owner A earned $40,000 last year and otherwise qualifies for the circuit breaker. That income places Owner A in the 5% circuit breaker bracket, capping their property taxes at $2,000. Owner B does not qualify for any exclusion.
I think the appropriate calculation and billing process under Senate Bill 2025-349 would be to first apportion the tax bill based on the ownership percentages and then apply the circuit breaker cap to the qualifying owner’s portion. In my example, the tax office would allocate $2,500 in taxes (50% of the total $5,000 tax bill) to each owner, bill $2,000 (the capped amount) to Owner A, and bill $2,500 to Owner B. As explained in #3 below, under Senate Bill 2025-349 the $500 in excess taxes over Owner A’s circuit breaker tax cap would be eliminated and not deferred as they would be under current law.
Now let’s make the scenario a bit more complicated, with co-owners who qualify for different exclusion programs.
Assume again that we have a property with two owners for which the tax bill would be $5,000 without any exclusions. As before, Owner A made $40,000 last year and qualifies for the circuit breaker. But now Owner B qualifies for the elderly/disabled homestead exclusion. This exclusion would provide a 50% reduction in the taxable value of the house (see the calculation process here), reducing the property’s total tax bill to $2,500 (50% of $5,000). I think the assessor would then apportion that $2,500 tax bill equally to each owner (because they each own 50% of the property), meaning each owner would get a bill for $1,250. Because that bill amount is below Owner A’s $2,000 circuit breaker tax cap, Owner A’s circuit breaker exclusion becomes moot and does not affect the end result.
3. Eliminate deferred taxes from the circuit breaker exclusion.
As discussed above, the circuit breaker currently creates a deferred tax liability for the amount of taxes that exceed the taxpayer’s tax cap. If the taxpayer’s cap is $2,000 and the actual tax bill is $3,000, then the excess taxes over the cap of $1,000 are deferred. These deferred taxes are a lien on the property and accrue interest. If the property is transferred or no longer used as the taxpayer’s legal residence, then the most recent three years of deferred taxes become due and payable.
For example, assume a taxpayer is in the circuit breaker for five years and defers $1,000 in taxes each year. Upon sale, $3,000 of deferred taxes (plus interest) from the three prior years would be due and payable while the $2,000 of deferred taxes from the first two years the taxpayer was in the program would disappear.
If Senate Bill 2025-349 passes, then any excess taxes exceeding the circuit breaker cap simply will be eliminated and will not be deferred. This change may make the circuit breaker much more popular, because the existing deferred tax lien dissuades many taxpayers from using the program—especially when many of them are also eligible for the elderly/disabled homestead exclusion which does not create deferred tax liabilities.
The changes mandated by Senate Bill 2025-349 would first take effect for the 2026-27 tax year. Deferred taxes created under the existing circuit breaker provision prior to the 2026-27 tax year would remain enforceable upon transfer of or change in use of the property.
Stay tuned to learn if Senate Bill 2025-349 becomes law . . .
