From: Burnet R. Maybank III, Member at Nexsen Pruet, LLC
When agricultural real property is applied to a use other than agricultural, it becomes subject to rollback taxes. In the year the use changes, the difference between tax paid under the agricultural use classification and the amount that would have been paid (typically as commercial) under full FMV is the rollback taxes and up until January 1, 2021, it is calculated for the previous five year period.
What is the difference? Ag use valuation is based upon crop yield and was frozen in 1991. For coastal and many other counties the difference between Ag Use FMV and the Commercial FMV can be enormous. In addition, many (But not all) Ag use properties are taxed at a 4% assessment ratio versus Commercial’s 6% assessment ratio, and the millage is different. This alone can contribute to a large rollback tax.
Rollback taxes typically rears its head when property is sold. The purchaser is required to sign an affidavit under oath typically within 30 days of the sale stating under penalties of perjury that it qualifies for Ag use. If the affidavit is not submitted, the assessor will automatically convert to commercial use and apply rollback taxes.
In S.C., there is no norm as to who pays the rollback taxes – buyer or seller – but this should be determined and dealt with at closing. From the seller’s prospective, it’s the buyer who is charging the use and therefore it should be responsible. From the purchaser’s prospective, it will be liable for thousands if not tens of thousands of additional taxes and the purchase price should reflect this.
Note that if it’s not handled at closing, eventually a rollback tax lien will be filed on the property, so it’s ultimately the purchaser’s problem.
This year in the shortened legislative session the General Assembly reduced the rollback tax period from five to three years. In some counties (Charleston, Beaufort) this may be a dramatic tax savings, while less so in rural counties.
The effective date of the Legislation is January 1, 2021. Running the numbers, for some transactions it will be well worth delaying the closing until next year. Could you have a dry closing this year, file the deed in 2021, and enjoy the three year rollback period? The statute is silent in this regard.
Fee-in-lieu completely eliminates rollback taxes and this should be a consideration for any large commercial project. A minimum investment of $2.5 million is required for a fee but many urban counties will not approve a fee for the statutory minimum.