Real Estate News

Can you rent out your house and still get a homestead exemption? Courts say yes

Staff illustration

Should local homeowners lose their homestead exemption — a property tax break given to seniors and residents with disabilities — if they rent out their homes for a significant portion of the year?

Beaufort County officials have argued yes.

But state courts have said the county is wrong.

A court battle has dragged on for years after the county assessor’s office stripped Hilton Head Island homeowner Frank Mead of his homestead exemption in 2011.

Mead turned 65, the age when you are permitted to claim the exemption, in 2004.

From 2005 to 2010, he received the tax break. But in 2011, Mead “rented his home out for at least 138 days,” according to court documents.

The county then denied his tax break.

Mead appealed, and the case has since snaked its way through the Beaufort County Tax Equalization Board, the S.C. Administrative Law Court and the S.C. Court of Appeals. Ultimately, the S.C. Supreme Court may be called upon to weigh in.

At issue is the legal question of whether the homestead exemption “is only available to property that also qualifies for the preferential residential (tax) assessment,” Appeals Court documents show.

Under the state’s two-tiered system, preferential assessments of a 4 percent tax rate are given to properties classified as primary residences.

Homeowners who rent their property for more than 72 days per year or maintain a primary residence outside of the county are taxed at a 6 percent rate, with that additional 2 percent going toward funding school operations.

The county — through a series of motions by attorneys with the Beaufort-based firm Howell, Gibson and Hughes — has argued that because in 2011 Mead rented his home for longer than permitted, he must be ineligible for the homestead exemption.

In essence, the county’s position is that the tax rate assessment and the homestead exemption are inherently linked.

Mead and his attorneys with the Nexsen Pruet law firm have disagreed with this interpretation of the law.

So have the courts.

The Administrative Law Court, an autonomous agency established to settle disputes between individuals and government agencies, determined that state law makes clear that “the primary residence classification and the homestead exemption are unrelated,” court documents say.

The classification and exemption are “two ships in the night,” the court determined.

“While his home was being rented, (Mead) traveled or stayed in an apartment,” according to court documents.

“The homestead exemption applies to a person’s dwelling place,” the court said, “and despite Mead’s practice of renting out his house ... he does not hold out any other property as his primary residence and thus, the subject property is his dwelling place.”

A homeowner could maintain their homestead exemption even if they don’t meet the primary residence classification requirements, the court said.

Beaufort County appealed, but a higher court agreed with the decision.

“Nothing in (the state) statutes providing the the requirements for eligibility for the homestead exemption make reference to the primary residence classification,” said a Dec. 21 opinion from the S.C. Court of Appeals.

State regulations require that the county move for a rehearing or file an appeal with a higher court within 15 days, but last week the county’s legal team requested an extension to that window.

The county’s attorneys had been “out of the state for the holiday vacation period,” according to the request.

County assessor Gary James — who took over the position from Ed Hughes in 2015 — said last week that the county is “considering appealing (the Dec. 21 opinion) to the (S.C.) Supreme Court.”

County leaders and legal representatives plan to meet with the S.C. Department of Revenue to discuss the agency’s interpretation of the case, he said.

James declined to speculate on potential impacts of the decision, beyond saying that it “could have a major impact, (or) it could have no impact at all if we appeal — we just don’t know yet.”

But if the Court of Appeals decision is upheld or goes unchallenged, it could set a precedent that may lead to more homestead exemptions, therefore decreasing overall property tax revenue for counties.