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Issue  229  Article  369
Published:  6/1/2016

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Builder's Inventory Exemption Pitfalls
Chris Burti, Vice President and Senior Legal Counsel

Session Law 2015-223, House Bill 168, authorized the Builder's Inventory Exemption for the increase in the ad valorem tax valuation for lots in a builder's inventory due to new home construction on unsold lots.

There are unexpected results that may occur when qualifying properties are transferred between January 1 and July 1 of a tax year.

Briefly, this law exempts from taxation the increases in a parcel's ad valorem tax value attributed to the subdivision of raw land by a builder, the infrastructure improvements (such as grading, curb and gutters, paving of streets, drainage improvements and installation of water, sewer, electric, communication utilities and related structures) to that subdivided land by a builder or the construction of a new single family residence or duplex held for sale by a builder. The builder must apply annually during the regular listing period for this exemption and when approved, the increase in tax value is exempt from taxation for that tax year.

The issue of concern that will most likely arise is in relation to N.C.G.S. 105-285(d). that provision requires that when real property that is exempt on January 1 is transferred before July 1, it shall be listed for taxation by the transferee as of the date of acquisition, appraised at its true value as of January 1 and taxed for the fiscal year that begins on July 1.

To illustrate: A builder owns a lot, constructs a new home on it and lists it for sale. The builder makes application for the exemption, the application is approved and the value of the improvement is exempt from taxation. The builder then sells the house and lot to a purchaser on March 1st which immediately disqualifies the exemption. The exempted value becomes taxable to the purchaser for the current tax year and they will receive a bill based on the full taxable value of the property in early July.

There are certain limitations of the program that are significant with respect to residential rental property and commercial real property. The statute defines residential real property as property that is intended to be sold and used as an individual's residence immediately or after construction is complete. Homes built for rental purposes do not qualify under the statute.

Commercial properties can also qualify for this program. However, the builder can benefit only from exemption of the value increase from land subdivision infrastructure and non-building improvements. Once a building permit is issued the property is disqualified.

If a closing attorney is preparing a closing in which the seller may be a builder or developer, we recommend contacting the applicable tax office to determine if the property involved has qualified for the Builder's Inventory Exemption.

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