New Property Tax Exclusion for Developers

Community and Economic Development – Blog by UNC School of Government

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New Property Tax Exclusion for Developers

By Chris McLaughlin

Published May 19, 2016

The start of the 2016-2017 fiscal year will bring with it a new property tax exclusion aimed at residential and commercial development.  Known informally as the “builders’ inventory” exclusion, the new law was passed as S.L. 2015-223 and will be codified as G.S. 105-277.02.

In today’s blog, I offer a quick overview of the new exclusion and highlight some issues that developers need to keep in mind if they intend to benefit from it.

For those who want more details, please see my previous Coates’ Canons’ Local Government Law Blog posts here and here or this Property Tax Bulletin.

Sixty-Second Overview:

The exclusion eliminates property taxes for several years on certain improvements on property owned and held for sale by builders.

For residential property, the exclusion extends for a maximum of three years and excludes property taxes on the increase in property value attributable to:

1. subdivision of a parcel for future residential construction;
2. non-structural improvements (grading, streets, utilities, etc.) for future residential construction; and,
3. construction of a new single-family home or duplex.

For commercial property, the exclusion extends for a maximum of five years and excludes property taxes on the increase on property value attributable only to non-structural improvements (grading, streets, utilities).  Any improvement that requires the issuance of a building permit for a commercial structure terminates eligibility for the exclusion.

The statute rather unhelpfully defines “commercial property” to mean any property that is “intended to be sold and used for commercial purposes immediately or after improvement.” I think this means that a site that is zoned for mixed use and therefore could be developed into either a commercial or residential structure, even if it is eventually developed into a residential apartment building, arguably could be considered “commercial property” prior to the point that a building permit is issued for a residential building.

Sale or Lease of the Property

Sale or lease of the property terminates all exclusions earned by the previous owner.  But if the new owner is a builder and is holding the property for sale, that new builder/owner may earn new exclusions based on its own new qualifying improvements.

For example, assume ABC Corp. owns Parcel A on which it intends to develop a 30-home subdivision.  ABC Corp. subdivides the parcel, grades the land, and lays out streets and initial utility lines. The builders’ inventory exclusion should apply to all of these improvements for up to three years.

If ABC Corp. were to sell the property to XYZ Corp. within those three years, the exclusions earned by ABC. Corp. would terminate. XYZ Corp. would be required to pay property taxes on the full taxable value of the property going forward.

There are no deferred taxes created under the builders’ inventory exclusion, so XYZ Corp. would not have any obligation to repay the exclusions earned by ABC Corp. in prior years as is the case under present-use value and other deferred tax programs.

XYZ Corp. could qualify for new three-year exclusions if it built houses on the property and held them for sale.  Those exclusions would terminate if XYZ Corp. sold or rented the new homes.

Annual Application Required

Unlike many property tax exclusions, the builders’ inventory exclusion requires the owner to submit an annual application by the end of the county’s listing period (usually January 31, sometimes extended to February or March).  Failure to submit an application will eliminate the exclusion for that tax year but will not affect the owner’s eligibility to receive the exclusion on the same property in future years if they are otherwise eligible.

January 1 Eligibility Date

Eligibility for the exclusion for the coming fiscal year is determined as of January 1, regardless of when the application is filed.  That means taxable value for the property and the improvements that are eligible for exclusion from that value will be determined as of that date as well.  For tax year 2016, the first year the exclusion is available, only those improvements made on or after July 1, 2015 will be eligible.

For example, assume that Big Builder, Inc. is constructing a subdivision.  The company buys parcel A in 2014, subdivides it and begins to build homes on the subdivided lots in early 2015.  If Big Builder wishes to benefit from the new exclusion for 2016, it can do so only for the construction completed between July 1, 2015 and December 31, 2015.  Any increase in value due to the subdivision will not be eligible for the exclusion because that occurred prior to July 1, 2015.  Any homes completely constructed prior to July 1 will also fall outside of the exclusion.  Homes that were partially completed as of July 1 will benefit from the exclusion to a limited extent; only the increase in value due to post-July 1 construction will qualify.

Mixed Use Construction

A builder creating a mixed-use development may benefit from the new exclusion, but those benefits will differ for different components of the development. For example, single family homes and duplexes are eligible for the exclusion, but larger multi-unit housing structures and commercial structures are not.

Consider a mixed-use development planned by Blue Devil Builders that will include 50 single-family homes, several free-standing commercial structures, and a large apartment building with retail space on its first floor.  The tax value increase attributable to the subdivision, grading, streets and utility work for the entire development should be eligible for exclusion.  However the maximum length of the exclusion will vary between the residential sites (3 years) and the commercial sites (5 years).

The single-family homes should be eligible for exclusion for 3 years or until they are sold, whichever comes first.  But neither the commercial structures nor the apartment building would be eligible.  When building permits are issued for these structures, any exclusions applying to those commercial sites will terminate.

Eclipsing the Site Infrastructure Deferral?

The new builders’ inventory exclusion seems likely to make the site infrastructure deferral even less popular than it’s been since debuting in 2013.  Eligibility for both exclusions are similar, meaning some commercial developers will be able to choose between the two property tax relief programs. Presumably very few taxpayers will choose the site infrastructure option, which creates a deferred tax liability for the excluded taxes, over the builders’ inventory option, which permanently eliminates the excluded taxes.

Chris McLaughlin is a School of Government faculty member with expertise in the law of property tax listing, assessment, and collection.