South Carolina Capital Gains Tax on Real Estate: What You Need to Know

Selling real estate in South Carolina comes with tax implications, particularly regarding capital gains. If you sell a property for more than you originally paid, the state may require you to pay taxes on that profit. Understanding these rules is crucial to avoiding unexpected costs.

While federal capital gains taxes apply nationwide, South Carolina has its own tax regulations that determine how much you owe at the state level. Factors such as residency status, property type, and exemptions influence your tax liability.

Non-Resident Withholding Requirements

South Carolina requires non-residents selling real estate in the state to comply with tax withholding rules. When a non-resident sells property, the buyer must withhold a portion of the proceeds and remit it to the South Carolina Department of Revenue (SCDOR).

The withholding amount is the lesser of 7% of the seller’s recognized gain or 2.5% of the total sales price. For example, if a non-resident sells a property for $300,000 with a taxable gain of $50,000, the buyer must withhold $3,500 (7% of $50,000). If the gain is unknown at the time of sale, the default withholding is 2.5% of the sales price, which in this case would be $7,500. Sellers can apply for a reduced withholding if they can show their actual tax liability is lower than the default amount.

Buyers must submit the withheld amount using South Carolina Form I-290 within 30 days of the sale. Failure to comply can result in penalties, including interest charges and potential liability for unpaid tax. Non-resident sellers may also need to file a South Carolina income tax return to claim a refund if the withholding exceeds their actual tax liability.

Calculating Taxable Gains

Taxable gain on the sale of real estate is determined by establishing the property’s adjusted basis, which includes the original purchase price plus costs such as closing fees, legal expenses, and capital improvements. Keeping detailed records of these expenses is essential.

To calculate taxable gain, subtract the adjusted basis from the final sale price after deducting allowable selling costs, such as real estate commissions and attorney fees. For example, if a property sells for $400,000 and the adjusted basis, including purchase price and improvements, is $250,000, with $20,000 in selling expenses, the taxable gain would be $130,000 ($400,000 – $250,000 – $20,000).

South Carolina treats capital gains as regular income but allows a 44% exclusion, meaning only 56% of the gain is subject to state income tax. If the seller falls into the 5% state income tax bracket, the effective tax rate on the gain would be 2.8% (5% of 56%). In this case, the taxable portion of the gain would be $72,800 (56% of $130,000), resulting in a state tax liability of approximately $3,640.

Primary Residence Eligibility

South Carolina offers tax benefits for homeowners selling their primary residence, potentially reducing or eliminating state capital gains tax. To qualify, the seller must have owned and lived in the home as their main residence for at least two of the five years before the sale. These periods do not have to be consecutive.

If the property meets these conditions, sellers may qualify for the federal home sale exclusion, which allows individuals to exclude up to $250,000 of gain ($500,000 for married couples filing jointly). South Carolina follows this exemption, meaning that if the gain does not exceed the exclusion limit, no state capital gains tax is owed. For example, if a married couple sells their home with a $200,000 gain, the entire amount would be exempt from state tax.

Sellers who do not meet the full two-year residency requirement may still qualify for a partial exemption if they sell due to job relocation, health issues, or other hardships. The exclusion is prorated based on the time lived in the home, providing some tax relief even if the full requirement is not met.

Treatment of Rental or Investment Properties

Selling a rental or investment property in South Carolina involves different tax considerations than selling a primary residence. These properties are classified as capital assets, and any profit realized upon sale is subject to taxation at both the federal and state levels. Because South Carolina treats capital gains as ordinary income with a 44% exclusion, landlords and investors must assess their potential tax liability before finalizing a sale.

Depreciation recapture significantly impacts the taxable gain on rental properties. The IRS requires property owners to depreciate residential rental buildings over 27.5 years, reducing taxable income during ownership. However, when the property is sold, the accumulated depreciation is subject to recapture and taxed at a federal rate of up to 25%. South Carolina does not offer an exclusion for depreciation recapture, meaning it is fully taxable at the state level. For instance, if an investor claimed $50,000 in depreciation deductions over several years, that amount would be taxed separately from capital gains, increasing the overall tax burden.

Like-kind exchanges under IRC Section 1031 allow investors to defer capital gains taxes by reinvesting proceeds into a similar investment property. To qualify, the replacement property must be identified within 45 days and acquired within 180 days of the sale. Failing to meet these deadlines results in immediate tax liability.

Adjustments for Capital Improvements

Capital improvements reduce taxable gains when selling real estate. Unlike routine maintenance or repairs, which cannot be deducted from the sale proceeds, capital improvements increase the property’s adjusted basis, lowering the taxable portion of the gain.

To qualify as a capital improvement, the expense must add value to the property, extend its useful life, or adapt it to a new use. Examples include kitchen remodels, roof replacements, home additions, landscaping projects, HVAC upgrades, and energy-efficient window installations. These costs are added to the original purchase price when calculating the adjusted basis. For instance, if a homeowner purchased a property for $200,000 and later spent $50,000 on a home addition, the adjusted basis would increase to $250,000. If the property is later sold for $350,000, only $100,000 would be considered taxable gain rather than $150,000.

Proper documentation is essential to substantiate these adjustments. Sellers should retain receipts, contractor invoices, and any relevant permits. The IRS and South Carolina Department of Revenue may require proof of these expenditures in the event of an audit. Additionally, improvements must be distinguished from repairs, as expenses like painting, fixing leaks, or replacing broken fixtures do not qualify. Keeping detailed records ensures that all eligible costs are accounted for, maximizing potential tax benefits.