Legislature Alters Exception for Deferred Tax Trigger Relating to Present Use Property

Kansas Summer Wheat and Storm on July 10, 2010

North Carolina General Statute 105-277.3 defines as special classes of property agricultural land, horticultural land, and forestland. Each class has its own requirements and all three have certain ownership requirements.

If a property owner believes that it owns property qualifying for classification in one of these three special classes, under Section 105-277.4, that owner can apply to have that property assessed at its present use value as opposed to its fair market value. If that application is granted, the difference in tax is not forgiven, but is instead deferred. If the property later loses its eligibility, the deferred taxes for the preceding three fiscal years become due and payable.

Section 105-277.4(d) includes certain exceptions to the rule that the deferred taxes become due. One of those exceptions covers property gifted to a nonprofit organization, the State, a political subdivision of the State, or to the United States. That exception was codified in Sections 105-277.4(d)(2) and (3). Session Law 2016-76 (House Bill 533), effective for tax years beginning July 1, 2016 and thereafter, broadens this exception through new Section 105-277.4(d1).  

(d1) Variable Exception. – Notwithstanding the provisions of subsection (c) of this section, if property loses its eligibility for present-use value classification because the property is conveyed to a nonprofit organization and qualifies for exclusion from the tax base pursuant to G.S. 105-275(12) or G.S. 105-275(29) or to the State, a political subdivision of the State, or the United States, then deferred taxes are due as follows: (1) If the property is conveyed at or below present-use value, then no deferred taxes are due, and the lien for the deferred taxes is extinguished. (2) If the property is conveyed for more than present-use value, then a portion of the deferred taxes for the preceding three fiscal years is due and payable in accordance with G.S. 105-277.1F. The portion due is equal to the lesser of the amount of the deferred taxes or the deferred taxes multiplied by a fraction, the numerator of which is the sale price of the property minus the present-use value of the property and the denominator of which is the true value of the property minus the present-use value of the property.

Under the new language, the conveyance of qualifying property at or below present-use value to a qualifying transferee and meeting 105-275(12) or (29), as appropriate, will not trigger the deferred taxes to become due. Moreover, even where the qualifying property is conveyed at more than present-use value, the deferred taxes will only become due in full when the sales price is equal to or greater than the property's fair market value. If the sales price is greater than present-use value but is less than fair market value, only a portion fo the deferred taxes will be due. To determine the amount, the full amount of the deferred taxes is multiplied by a fraction. The numerator is the amount that the sales price exceeds the present-use value, and the denominator is the amount that the sales price exceeds the fair market value.

This legislative change will not have broad impact, but in addition to testing your math skills, it will have meaningful impact in the limited situations in which it applies.

Image by Flickr user Nvvchar. Licensed for use under Creative Commons Attribution 2.0 Generic license.

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Justin Hardy

Justin M. Hardy

Justin focuses his practice on property tax appeals, intellectual property law, tax controversy law, and general business law.  He is a regular contributor to both The North Carolina Property Tax Law Monitor and The Trademarketing Blog.  You can follow him on Twitter @JustinHardyBDP.
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