South Carolina Lawyer
SC Lawyer, January 2009, #5.
Implications of the South Carolina Real Property Valuation Reform Act on Business and Trust Transactions
South Carolina LawyerJanuary 2009Implications of the South Carolina Real Property Valuation Reform Act on Business and Trust TransactionsBy Alyson C. Campbell and Scott Y. BarnesIntroduction
When planning transactions involving business entities or trusts that own real property, attorneys should be aware of the South Carolina Real Property Valuation Reform Act (the "Act"). S.C. Code Ann. §§ 12-37-3110 through 12-37-3170 (Supp. 2007). The Act provides that some transactions, even some not directly involving real property, will trigger a fair market value appraisal of real property owned by the business entity or trust, which will be the basis of ad valorem taxes.
This article will examine how the Act affects transactions by business entities and trusts that own real property and relevant issues with which counsel to such business entities and trusts should be familiar.
Assessable transfer of interest
The first question to consider is "Will the transfer result in an assessable transfer of interest (an "ATI")?" If so, then the transfer will trigger an appraisal of the underlying real property to determine its fair market value and additions and improvements thereto, which will be the basis of the property's value for purposes of determining ad valorem taxes. S.C. Code Ann. § 12-37-3130 (3) and (4). Because ad valorem taxes are normally based on assessments that over time no longer reflect current market values, an appraisal will likely result in higher taxes. Under the Act, the value of the property is its fair market value as of the latest of:
(a) its appraised value for the property tax year 2007; (b) December 31st of the year in which an assessable transfer of interest has occurred; (c) as determined on appeal; or (d) as it may be adjusted as determined in a countywide reassessment program conducted pursuant to Section 12-43-217, but limited to increases limited to 15 percent within a five year period to the otherwise applicable fair market value.
S.C. Code Ann. § 12-37-3140 (A)(1). See also S.C. Code Ann. § 12-37-3140 (C). As a result, after an ATI, the fair market value will generally be used to determine ad valorem taxes for the following tax year. S.C. Code Ann. §§ 12-37-3120 & 12-37-3140.
Transactions considered ATIs range from the intuitive to the not-so-intuitive. The not-so-intuitive examples apply to trusts and business entities. The Act provides the following nonexclusive list of ATIs: (1) a conveyance by deed; (2) a conveyance by land contract; (3) a conveyance to a trust; (4) a conveyance by distribution from a trust; (5) a change in the sole present beneficiary or beneficiaries of a trust; (6) a conveyance by distribution under a will or by intestate succession; (7) a conveyance by lease if the total duration of the lease, including the initial term and all options for renewal, is more than 20 years or the lease grants the lessee a bargain purchase option; (8) a transfer of an ownership interest in a single transaction or as a part of a series of related transactions within a 25-year period in a corporation, partnership, sole proprietorship, limited liability company, limited liability partnership or other legal entity if the ownership interest conveyed is more than 50 percent of the corporation, partnership, sole proprietorship, limited liability company, limited liability partnership or other legal entity; (9) a change of use of agricultural real property that subjects it to the rollback tax; (10) a change of use of real property when classification of property changes as a result of a local zoning ordinance change; or (11) the passage of 20 years since the later of the base year or the last assessable transfer of interest for real property owned by a publicly-held entity whose stock, shares or other ownership interests are traded on a regulated exchange, a pension fund or similar entity. S.C. Code Ann. § 12-37-3150 (A)(1) - (11).
ATIs and trusts
Items 3, 4 and 5 above specifically apply to trusts. Items 3 and 4 implicitly require conveyances of real property. Item 5 does not directly involve real property; therefore, the Act should be considered when there is any change in the sole present beneficiary of a trust that owns real property.
A conveyance to a trust...