Does your seller owe a potentially unknown tax bill of thousands at closing?
An often-overlooked question that one should be asking themselves when they represent a seller or a buyer in a residential transaction, is whether the selling party has any tax exemptions or deferments on their property. The answer to this question could potentially save buyers hundreds to thousands of dollars from taxes when they purchase residential property.
Property tax in North Carolina is a locally assessed tax and collected individually by the counties. Real property taxes (also known as “ad valorem” taxes) are “imposed by municipalities and counties based on the assessed value of the real property as of January 1st and the tax rate the municipality and/or county sets by June 30.” (www.ncbar.org). Moreover, all real property within the state is subject to taxation unless it is excluded/exempted or deferred. (N.C. Gen. Stat. § 105-274).
North Carolina General Statutes allow for certain types of property to be exempt from taxation if they meet the requirements specified by the statutes. For example, North Carolina state law allows property tax exemptions for “low-income seniors and disabled homeowners, as well as disabled veterans or their unmarried surviving spouse.” (www.wakegov.com).
There is a July 1 rule for property tax exemptions in North Carolina because that is the day in which tax assessors take a theoretical snapshot of a property’s ownership and use. If someone has qualified for a tax exemption on January 1st of said year, then the property tax for that exemption will be discharged for the entire year, unless the property is sold before July 1 of that same year. (N.C. Gen. Stat. § 105-285(d)). For example, suppose a seller has a tax exemption and sells their home on or before June 30. In that case, the new owner will be responsible for the entire year of taxes because the law treats the new owner as being the owner from January 1 of the same year, for tax purposes. However, if a seller has a tax exemption and sells their home after July 1, then the new owner doesn’t have to worry about paying the exempted property tax until the following year.
North Carolina General Statutes also allow for certain types of property to be deferred from taxation if they meet the requirements specified by the statutes. For example, North Carolina state law allows property tax deferment programs such as agricultural (farm use), forest land, horticultural, and wildlife conservation. Deferred taxes are “taxes that, because of an exclusion, are not due and payable in the year in which they are levied but may become due and payable when the underlying property is no longer eligible for the applicable exclusion.” (www.sog.unc.edu). Therefore, an issue may arise if ownership of the property is transferred to someone that doesn’t qualify for the same deferment tax program. If this is the case, then the three most recent years of deferred taxes become immediately due, payable, and delinquent. Further, North Carolina case law hasn’t answered the question of who is ultimately responsible for the deferred taxes, and “most tax collectors would conclude that both the seller and buyer are responsible.” (www.sog.unc.edu). Therefore, it is highly recommended that both parties in a residential property transaction determine deferred taxes prior to the sale.
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