Key Points
- South Carolina’s proposed law would tie property tax exemption to ownership share. Proposal would tie a nonprofit housing corporation’s property tax exemption to its percentage ownership in a qualifying property if its ownership share is 50% or less.
- Existing exemptions will not be affected. Proposal only affects tax exemption applications for property tax years beginning after 2026.
- Higher tax burden for new applications. The result would be an increased property tax bill for many properties owned or managed by nonprofits applying for exemption under the new law, including exempt properties transferred to new owners.
- Remedies have their own risks. Nonprofit corporations owning less than 50% of qualifying properties can restructure their ownership to exceed the threshold, but there are a variety of associated risks and costs.
- Income exception. Properties renting exclusively to tenants with 80% or less of an area's median income (AMI) are excepted from the ownership requirement.
South Carolina lawmakers are considering legislation that would tie the statewide property tax exemption available for low-income housing owned or managed by a nonprofit to the nonprofit’s percentage interest in a qualifying property — potentially increasing their real estate tax exposure. If passed by the state Legislature during the next session, which begins Jan. 13, 2026 and ends in May 2026, and signed into law by the governor, the changes under the current version of the bill would take effect in 2027.
Nonprofit housing corporations currently enjoy full property tax exemption on qualifying low-income property regardless of their ownership share.
Details of the Change
Under Senate Bill 125, currently in the House Committee on Ways and Means, nonprofits owning 50% or less of a qualifying property (properties satisfying the criteria set forth under Subsections (a)-(e) of Section 12-37-220(B)(11) of the S.C. Code), applying for tax years beginning after 2026, would receive a tax exemption equal only to their ownership share. A nonprofit owning 40% of the qualifying property, for example, would only be entitled to exempt 40% of the property’s value from taxation.
Exceptions
As currently structured, the bill would create two exceptions:
- Nonprofits owning more than 50% of the qualifying property will receive a full exemption regardless of the nonprofit’s percentage interest above 50%.
- If all of the units in the property are devoted to residents qualifying as low-income (defined as 80% or less of an area's median income), the property will receive a full exemption regardless of the nonprofit’s percentage interest in the owner entity.
Additionally, the bill would require that:
- The nonprofit submits annual statements to the Department of Revenue certifying its interest in the qualifying property and compliance with the safe harbor provisions of Revenue Procedure 96-32.
- The Department of Revenue notify the mayor and governing body of the municipality in which the exempted property is located.
Practical Implications for Nonprofits
If nonprofits owning 50% or less of a qualifying property that includes any market rents are unable to restructure their ownership to exceed that amount, they would qualify for a much lower tax exemption. Such an increase in taxes could negatively impact project budgets and expected returns, thereby diminishing the incentive to build and maintain low-income housing in South Carolina. In many cases, obtaining a full tax exemption would necessitate partnership restructuring, which can have significant tax implications and perhaps require additional capital contributions. Put simply, the bill could make a lot of investors rethink whether to invest in and develop affordable housing in South Carolina.
The annual certifications would also impose administrative burdens that increase expenses and complicate property management. Submitting the certificate may be simple, but the process whereby a nonprofit, as part of the ownership structure of the property, confirms its qualification for the tax exemption on a yearly basis would almost certainly involve additional legal fees and other expenses associated with compliance. Those expenses add up.
Will SC Affordable Housing Move to Other States?
The proposed changes would also make South Carolina’s law more restrictive than North Carolina’s comparable law with respect to ownership requirements. Under N.C.G.S § 105-278.6(a)(8), real property owned by a nonprofit providing low-income housing can be exempt from taxation even if the nonprofit’s actual ownership interest is minor in nature as long as the nonprofit meets certain factors established by the North Carolina Court of Appeals in In re Blue Ridge Housing of Bakersville LLC. While the exception if all units are rented to tenants with 80% or less AMI is comparable to North Carolina's requirements, North Carolina allows for partial exemptions where the entire property does not meet the 80% test. Accordingly, investors might make the decision to invest just across the border in North Carolina or perhaps other states where the current law makes more financial sense.
Effect on Low-Income Tenants
Increased taxes, or the substantial expenses associated with ownership structure changes to avoid them, may result in fewer affordable housing units being created and existing affordable units transitioning to market rents. On the other hand, the exception for renting all units to tenants earning 80% or less of AMI may incentivize owners to provide exclusive affordable housing at properties relying on the existing law that allows up to 25% of the units to be at market rates. It's hard to say which outcome will outweigh the other if this bill is passed.
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