When you sell assets like investments or real estate in the state of South Carolina, the profit you make doesn’t just fall into your pocket. In just about any situation where you’re taking a profit above what you paid, you’re subject to capital gains taxes. For homeowners in particular, knowing more about how capital gains taxes may apply to your situation can be important if you’re considering entering the market as a seller. Having a clear grasp of things can help prevent some costly surprises later.
So, with that in mind, we’ve put together this guide to capital gains tax in South Carolina. We’ll dig into how the federal rules differ from our state-level levies, and what exemptions or strategies you could use to lower your tax liability. It doesn’t matter if you’re getting ready to sell a house, revising your investment portfolio, or just trying to decipher the South Carolina tax code; we’ve got the information you need. Get the essentials right here, so when the next step comes along, you’ll be ready.
Capital gains taxes are the levies placed on the profit earned from selling a capital asset at a higher price than what you originally paid. Put simply, if you bought a house for one price and later you sold it for a higher sale price, the difference is your taxable gain. This may also be called a tax basis in some situations.
Capital gains can typically be split into two categories: short-term and long-term gains. This differentiation determines how the gains are taxed.
Short-term capital gains are profits resulting from selling something you’ve held for one year or less. Short-term gains are taxed at your ordinary income tax rate. Long-term gains are what you get after selling something you’ve held for more than a year. The federal capital gains tax rate can range from 0% to 20% federally, depending on your income tax bracket.
These rules are important in real estate. Profits from selling a home, rental property, or raw land in South Carolina could be subject to federal capital gains tax as well as state-level taxes. Combined, the aggregate of state and federal liability is known as your total liability.
The federal government sets capital gains tax rates across the country. Short-term gains are lumped in with your federal taxable income, but long-term gains get preferential rates of either 0%, 10%, or 20%. There may also be additional taxes, like the net investment income tax, or NIIT, that can apply to high earners.
On top of these federal long-term capital gains tax rates, South Carolina has built its state-level tax framework. While some states simply mirror federal law, South Carolina provides a partial exemption of net capital gains. What this means is that most residents don’t pay the full state income tax on their gains; they pay a reduced amount after a state tax deduction.
When combined, federal and state rules create your overall capital gains tax burden. For example, if you fall into the 15% federal bracket, you’ll owe that amount to the IRS when you file your federal income tax return. But you’ll also owe a reduced percentage to South Carolina. Understanding this interplay is key for homeowners planning a sale of the property.
South Carolina doesn’t impose capital gains taxes at the full state income tax rate. Instead, it allows a 44% deduction on net long-term capital gains, which reduces the effective rate. This year, that means instead of paying the top marginal income rate of 6.4% on gains, most residents will pay closer to 3.6% after the deduction. This reduced rate helps homeowners and investors retain more of their home sale profits compared to states with higher burdens.
There are a couple of exemptions that are worth keeping in mind. First, the profits from the sale of a primary residence with a mortgage or without can be excluded up to $250,000 for single filers or $500,000 for those filing jointly. Certain inheritances, retirement accounts, and stock sales may be eligible for special treatment under both state and federal law.
Because these exemptions interact with federal rules, homeowners in South Carolina need to have a solid grasp of both sets of guidelines before committing to a transaction. If your situation is complex or your property sale may result in substantial profit, it may be worth it to contact a tax professional.
This probably seems like the most obvious strategy, because it likely is. Short-term gains are taxed much more heavily than long-term gains, so just hold your assets longer. If it’s challenging, try only investing in assets you won’t need for at least a year. It can cut your tax burden nearly in half, so it’s worth a try.
If you have investments that have lost value, or if you got caught holding the bag at some point, those losses can be part of your tax strategy. By realizing certain losses, you can offset the liability generated by your gains.
Certain retirement accounts, like a 401(k) and some IRAs, allow tax-deferred or tax-free growth. By investing through these channels, you can reduce the impact of capital gains altogether.
One of the most important tax benefits for homeowners in South Carolina is the exclusion for primary residences. If you’ve owned and lived in your home for two of the past five years, it qualifies as your primary residence. As such, you can exclude up to $250,000 of capital gains from taxes if you’re single, or $500,000 if you’re married and filing jointly.
The reduced state capital gains tax rate in the Palmetto State doesn’t exist in a vacuum. Your personal, overall liability is determined by federal brackets in conjunction with the state’s partial exemption. A homeowner selling an investment property may find themselves in the 15% federal long-term gains bracket. South Carolina then adds its own effective rate of about 3.6%, leading to a combined liability of roughly 18.6%. For higher earners in the 20% federal bracket, the total could be more than 23% when state taxes are finally factored in.
Capital gains taxes don’t just affect home sales. They impact a variety of transactions, though real property and business deals tend to be the most common in the Palmetto State.
Selling property can trigger significant tax liability, especially if it’s not your primary residence. Rental homes, vacation property, investment property, and land sales all fall into this category, often with fewer exemptions available.
The best way to lower your tax liability consistently is to hold assets for a minimum of one year and one day. Before you sell any assets, double-check that they’ve been part of your portfolio long enough to qualify for long-term rates. If all else fails, and you need to sell fast, selling for as close to your cost basis as possible will minimize your capital gains.
Certain selling costs, like closing fees, real estate agent commissions, and legal expenses, can also reduce the taxable amount. Now, these deductions definitely won’t eliminate your tax bill, but they sure can soften the impact.
Tax laws evolve, and staying on top of South Carolina capital gains tax changes is important, especially if you own multiple properties. Tax brackets, deductions, exemptions, and exact values are adjusted frequently by the state legislature. Missing just one update can mean a costly surprise later. To stay up to date, periodically check with the South Carolina Department of Revenue for updates.
Selling property for profit automatically locks you into filing capital gains paperwork at tax time. When you sell, to stay on the right side of the regulations, you’ll need to:
Partnering with an expert tax professional can help make the process much smoother, particularly when complex sales or inherited estates are involved. They’ll be able to verify that you don’t overlook deductions, make sure you file on time, and avoid misinterpretation of details that could trigger an audit.
For most homeowners, facing capital gains taxes can feel daunting. You might even be expecting a huge tax bill. But, with the right information about exactly what is subject to federal and state capital gains taxes, you’re much better equipped to plan in the future. Getting your tax plan ready ahead of time is the key to protecting your profits long-term.
If you’re considering selling your home but are a little nervous about what the tax implications could be when selling on the market, a cash sale could be perfect for you. With a fair offer and a stress-free process that can sell your home fast, partner with High Noon Home Buyers.
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