How is Rental Property Taxed in South Carolina?
Understand the tax framework for SC rental properties, from how your property is valued to calculating and reporting your net rental income.
Owning rental property in South Carolina introduces state and local tax obligations distinct from those for a primary home. Landlords must navigate two main taxes: the annual property tax assessed by the local county and the state income tax on rental profits. Each tax has its own rules, calculations, and required filings. This guide provides an overview of these tax areas to help property owners meet their responsibilities.
Understanding Property Tax on Rental Properties
Property tax in South Carolina is based on a property’s fair market value and a specific assessment ratio. While a primary residence is assessed at a 4% ratio, investment properties, including rentals, are subject to a higher 6% assessment ratio.
To calculate the tax, the property’s fair market value is multiplied by the 6% assessment ratio to find its assessed value. For example, a rental property with a fair market value of $300,000 would have an assessed value of $18,000.
This assessed value is then multiplied by the local millage rate to determine the property tax owed. The millage rate is the tax per $1,000 of assessed value and is a composite of rates set by local authorities like the county, city, and school district. These rates vary by location, so tax liability can differ for properties of the same value.
Using the previous example, if the local millage rate is 250 mills (0.250), the annual tax would be $4,500 ($18,000 x 0.250). Furnishings and appliances in a rental are also subject to a personal property tax, assessed at a 10.5% ratio, which requires a separate filing with the county auditor.
Calculating State Income Tax on Rental Income
South Carolina also imposes an income tax on the net earnings from a rental property. The calculation begins with gross rental income, which includes all revenue from the property. This consists of rent payments as well as other charges like late fees, pet fees, and forfeited security deposits.
From this gross income, owners can subtract operating expenses to lower their taxable income. South Carolina’s rules for deductions align with federal guidelines for costs necessary to maintain the rental. Common deductions include:
- Mortgage interest
- Property insurance
- Local property taxes
- Repairs and maintenance
- Property management fees
- Advertising costs
- Utilities paid by the owner
Depreciation is another deduction, allowing for the recovery of a residential building’s cost over a 27.5-year period per federal tax law. This non-cash expense lets an owner deduct a portion of the property’s value annually. Repairs are deductible in the year they occur, while capital improvements are depreciated over time.
After subtracting all allowable expenses from the gross rental income, the resulting net income or loss is subject to South Carolina’s graduated income tax rates.
Required Tax Filings and Information
Landlords must use specific forms to report rental income and expenses. The process starts with the federal tax return, as South Carolina’s calculation begins with the income determined on Federal Schedule E, “Supplemental Income and Loss.” On this form, owners report total rental income and categorize all deductible expenses.
The net income or loss from Schedule E is carried over to the South Carolina Individual Income Tax Return, Form SC1040. This figure is combined with other income to determine the total state taxable income. Landlords must keep organized records like receipts and mortgage statements (Form 1098) to substantiate their reported figures.
Owners of short-term rentals have additional requirements. They must collect a state sales and accommodations tax from guests and remit it to the South Carolina Department of Revenue. Many cities and counties also levy local accommodations taxes, which require separate filings. Municipalities may also require rental property owners to obtain and renew a local business license.
The Filing and Payment Process
After completing the forms, returns must be filed and any tax paid. South Carolina allows for electronic filing through tax software or the Department of Revenue’s website. Taxpayers can also mail their paper SC1040 and schedules to the address provided in the form instructions.
Payment can be made with the filing through electronic options like direct debit or by mailing a check with the return. The deadline for filing and paying South Carolina income tax is April 15th, unless an extension is filed.
Non-Resident Withholding
Non-resident owners face a withholding requirement if they receive $1,200 or more in annual rent. The payor, such as a property manager, must withhold a portion of the gross rent and remit it to the Department of Revenue. The withholding rate for individual owners is tied to the state’s maximum individual income tax rate, while the rate for corporate owners is 5%. Non-resident owners must still file an SC1040 to report their income and can claim the amount withheld as a payment against their total tax liability, which may result in a refund.