Tax Tips for a Resurgent Real Estate Market

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Chris McLaughlin

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I’ve written several blog posts about how the pandemic might affect local taxes (here, here, here, and here), focusing mostly on negative economic news.  But there is at least one positive economic development from the pandemic that will impact property taxes; the residential real estate market is very strong across most of North Carolina.

In the Wilmington area, the number of residential sales were up 22% in 2020 as compared to 2019, with sales prices increasing over 10%.  The same is true in Charlotte (prices up 11%) and in the Triangle (sales up 11%).

Here are a few tax tips to keep in mind as residential sales heat up.

  1. Who should get the tax bill for a recently transferred property?

Best practice is for counties to update their ownership records just before printing their bills to ensure that those bills are mailed to the current owners.

While it’s true that the Machinery Act generally requires property to be listed in the name of the January 1 owner (see GS 105-285 and GS 105-302), the law does not require tax bills to be sent to those listing owners. The Machinery Act is silent on that issue, which means local governments can do as they please with their tax bills.  Given that the current owners and not the previous owners will be responsible for the new taxes if they become delinquent (see GS 105-365.1), it makes sense that those new taxes should be billed to the current owner and not the former owner.

Assume Tom Tarheel owns Parcel A in Carolina County on January 1, 2021.  He sells the property to Wanda Wolfpack on March 1, 2021.  Before Carolina County prepares its bills in July 2021, it should update its ownership records and send the 2021 tax bill to Wanda and not Tom.

If the 2021 taxes become delinquent (on January 6, 2022), Wanda and not Tom will be personally responsible for those taxes.  Billing Tom is unhelpful because even if he tears up that bill and ignores it the county will have no remedies against him. When the county later pursues enforced collection actions against Wanda, the responsible owner for 2021 taxes, she is going to be furious and claim she shouldn’t be held responsible because she never got a bill.  We know that argument is a losing one thanks to GS 105-348, but it’s always best to avoid antagonizing taxpayers whenever possible.  Sending tax bills to the new owners minimizes the risk that new owners will be surprised by subsequent enforced collection actions.

Also remember that the county is not bound by an agreement between buyer and seller about how to allocate responsibility for property taxes on the transferred property.  The county must enforce personal responsibility for property taxes as described in GS 105-365.1 and not as described in private agreements between buyer and seller.

In the above example, it would not matter if Tom and Wanda had agreed that Tom would be responsible for 2021 property taxes.  Despite that agreement, the county’s only remedy would be against Wanda as per GS 105-365.1.  Wanda might have the right to sue Tom to enforce their agreement if she’s forced by the county to pay the 2021 taxes, but that is a private dispute that does not involve the county.

  1. May the county release the lien on one subdivided parcel when it is sold even if the rest of the taxes on the parent parcel are not paid?

Yes, but the county is not required to do so.

GS 105-362(b)(2) states that when property is subdivided the county may have a subdivided parcel separately appraised and, if the resulting taxes are paid, release the lien on that parcel regardless of whether the remaining taxes on the parent parcel and/or other subdivided parcels are paid. But note this provision says “may” and not “shall,” meaning it’s optional. (Confused by the reference to the “tax supervisor” in this provision? That archaic language should be interpreted as referring to the assessor.)

Here’s how this provision works in practice.  Dave the Developer owns Parcel B in Carolina County as of January 1, 2021.  In March 2021 he subdivides Parcel B and sells one of the subdivided parcels to Billy Blue Devil.  Billy asks the county what he needs to pay to eliminate the 2021 tax lien on the subdivided parcel.  Under GS 105-362, the county has an option. It can either (i) require payment of all 2021 taxes on Parcel B or (ii) assess the newly subdivided parcel and require payment only on that parcel.

Don’t forget about Dave’s personal property taxes, which are also lien on all of his real property in the same county.  If Dave does owe 2021 personal property taxes in Carolina County, Billy will need to pay a proportionate share of those personal property taxes in addition to the real property taxes on the subdivided parcel in order to eliminate the 2021 lien on that subdivided parcel. See GS 105-362(b)(1).

  1. What happens to exemptions and exclusions on transferred property?

Property sold by an exempt (or partially exempt) owner to a taxable owner prior to July 1 loses the exemption for that tax year. GS 105-285(d).

In a nutshell, this statute requires that the assessor assess the transferred property as if the new owner owned the property on January 1.  This is one exception to the rule that we list and appraise property in accordance with its January 1 owner.

Assume Grandma Gigi is receiving the elderly and disabled exemption on her home at 123 Main St.  She decides to take advantage of the strong real estate market and sell her home in March 2021.  If the new owner is not eligible for the elderly and disabled exclusion, the property at 123 Main St. will lose that exclusion for the 2021 year.

This rule is especially important to remember when dealing with new homes that are receiving the builders inventory exclusion under GS 105-277.02. (See this bulletin for details.) Because this exclusion is aimed at property held for sale, the increase in residential sales means that more and more of these properties are likely to be selling prior to July 1 and lose their exclusions.  Tax offices should remember the GS 105-285(d) rule when prospective buyers call to learn what their taxes will be for the coming tax year.

For example, assume Bob the Builder develops the Del Boca Vista “active living” community near the NC coast.  Bob obtains the builders inventory exclusion for all 100 homes he builds and is holding for sale in the community.

The Costanzas are interested in buying one of those home (Parcel C) and in March 2021 they call the county to learn what tax liens exist on that parcel.  The county tax office reports that the 2021 tax lien on Parcel C is a mere $50, representing taxes on that parcel’s portion of the taxable value of the undeveloped land originally purchased by Bob.  (The value of all improvements made by Bob, including the value of the newly constructed home on Parcel C, is excluded under the builders inventory exclusion.)  The Costanzas purchase Parcel C in April 2021.

When the county later creates the 2021 tax bill for Parcel C, what value should be taxed?  Because that parcel was sold prior to July 1, 2021, the parcel loses the builders inventory exclusion for 2021 and must be taxed at its full value.  When the Constanzas get a 2021 tax bill for several thousand dollars more than the $50 they were quoted in March, they hit the roof (as often occurs).

Did the county misquote the taxes when they spoke to the Costanzas in March? No. But nor did the county give the Costanzas the full picture, because the county didn’t indicate that the exclusion applied to Parcel C would be terminated if it were sold prior to July 1. Best practice is to flag properties receiving the builders inventory exclusion so that office staff know to inform prospective buyers that their bills will increase if they buy the properties in the first half of the calendar year.

Of course even if the tax office had misspoke, oral misstatements by the tax office are never binding and will never waive a taxpayer’s obligation for the taxes involved.  Nevertheless, it’s best always to give the taxpayer as much accurate information as possible—and perhaps suggest the “serenity now” mantra—to avoid temper tantrums down the road.

I’ll be discussing these issues and more tax topics related to the pandemic at my upcoming webinar:

2021 Property Taxes in a Pandemic Webinar  

Tuesday February 23, 2021

10:00 am – 12:00 pm (tentative)

Registration: For more information and to register, please click here.

 

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