Property Tax Exemptions for Community & Economic Development

North Carolina property tax law, nicknamed the Machinery Act, contains many dozens of full or partial exemptions for property as diverse as free drug samples, uranium 233, and Loyal Order of the Moose clubhouses.

This blog post attempts to identify which of these property tax breaks that might be relevant to a local government’s community and economic development plans.  Before we get to that list, I first offer some context and general observations about North Carolina’s property tax system.

Uniformity

Remember that only the General Assembly has the authority to create exemptions from property taxes. Local governments may not create their own custom exemptions; they all need to play by the uniform, statewide rules created by the General Assembly. See this post for more on our state constitution’s uniformity clause.

Exemptions vs. Exclusions

The terms “exemption” and “exclusion” both refer to provisions that remove some or all of the value of a particular property from taxation. Technically, exemptions are the property tax breaks listed in the state constitution (Art. V, Sect. 2(3)) for government, educational, scientific, literary, cultural, charitable, and religious property.  They reduce the taxable value of property to zero. Exclusions cover a wide variety of property and either eliminate all of a property’s taxable value or reduce it by a specified amount. The two terms are often used interchangeably; in this blog post I’ll stick with the term “exemption” for simplicity.

It is possible to combine multiple exemptions on the same property.

The Use Requirement

Other than the exemption for government property, all exemptions create requirements for both ownership and use of the property in question. To be exempt, property (other than that owned by a government) must be owned by a qualifying organization and be used by that organization for a qualifying purpose.  See this blog post for more details.

Due to the use requirement, vacant, unused land generally does not qualify for an exemption even if owned by a qualifying owner (other than government owned land, which is essentially always exempt).  However, a relatively recent Court of Appeals decision suggests that partial construction satisfies the use requirement.  If a qualifying owner has begun construction on a building that will eventually be used for an exempt purpose, that land and improvement likely qualifies for an exemption.  See this blog post for more on partial construction.

Exemption Eligibility Dates

Eligibility for property tax exemptions is generally determined by ownership and use as of January 1, the “listing date” for taxes to be levied in the coming fiscal/tax year that runs from the following July 1 to June 30.  For example, eligibility for exemptions from property taxes levied for the 2024-2025 tax year was determined by the ownership and use of property as of January 1, 2024. See this blog post for more.

Exemptions are applied only for full tax years; they are never prorated for a portion of the tax year. If property is taxable on January 1, it is fully taxable for the coming tax year even if it is later sold to an exempt owner. But thanks to the “July 1 rule,” exempt (or partially exempt) property that is sold to a taxable owner prior to the start of the tax year on July 1 becomes fully taxable for that tax year.

For example, assume that Tina Tar Heel owns Parcel A.  She sells it to the University of North Carolina (UNC) in April 2024.  Parcel A remains taxable for 2024 because it was owned by a taxable owner as of January 1, 2024.

Now reverse the example; assume UNC sells the previously exempt Parcel B to Tina in April 2024.  Parcel B would become taxable to Tina for 2024 because it was sold by an exempt owner to a taxable owner prior to July 1, 2024.

Deferred Taxes

Some exclusions create deferred tax obligations on the difference in value between the full market value of the property and its reduced taxable value. The most common example of this deferral is the present-use value program in G.S. 105-277.3.  Under that exclusion, qualifying farmland is taxed at its present use (farming) rather than its true market value (for development).

Deferred taxes are not immediately due and payable but they are a lien on the property and accrue interest. If a disqualifying event occurs, a certain number of years of deferred taxes will become due—three years, in the case of present-use value property.  The definition of a disqualifying event varies from exclusion to exclusion, but is usually based on a change in ownership or a change in use of the property. For example, the sale of present-use property to a developer would constitute a disqualifying event and trigger a three-year “roll back” of deferred taxes.  G.S. 105-277.1F creates several uniform provisions governing deferred taxes.

Tax Rates

Exemptions affect the taxable value of property, not the tax rate levied on that property. Every jurisdiction that levies property taxes must choose one tax rate that applies to all property located in that jurisdiction.  A local government may not choose different tax rates for different types of property; the one tax rate adopted by a local government will apply uniformly to land, buildings, cars, business equipment, and every other type of property located within that local government’s boundaries.

The only exception to the “one-tax-rate-per-jurisdiction” rule is a special service district, which allows a local government to levy an additional property tax on a particular area of its jurisdiction to fund additional services in that area. But even then uniformity is required, as all property in the special service district must be subject to one uniform additional property tax rate.

For example, assume Blue Devil City’s “regular” property tax rate is 65 cents and that it levies an additional 8 cents of property tax in a “downtown revitalization district” (sometimes referred to as a “business improvement district” or “BID”) created under the special service district provisions.  All property—land, buildings, equipment, vehicles—that lies in the special service district will be subject to a combined tax rate of 73 cents, while property sited elsewhere in the city will pay only the 65-cent tax rate. For more on property taxes in special service districts, see this post.

Okay, enough background.  Here is the list of exemptions that are most likely to be relevant to a local government’s community and economic development activities.

Housing-Related Exemptions

Builders inventory (G.S. 105-277.02):

Vacant, newly built homes held for sale by a developer are exempt from property taxes for up to 3 years or until the homes are sold, whichever comes first.  The exclusion can also apply to commercial development, but in a much more limited scope; the commercial exclusion ends when a building permit is issued. See this post or this one for more details.

Circuit breaker residential exclusion (G.S. 105-277.1B):

A tax deferral for elderly homeowners with incomes below a certain level ($55,050 for 2024).  Depending on the taxpayer’s income, property taxes are capped at either 4% or 5% of their income with the rest of their property tax bill deferred.  The most recent three years of deferred taxes are due when the home is transferred or no longer used as the taxpayer’s legal residence. While this exclusion is not very popular across the state, each year there are legislative proposals to expand its reach.

Community land trust property appraisal (G.S. 105-277.17):

Mandates a special appraisal method for community land trust property.  Among other requirements, assessors must take into consideration any resale restrictions that apply to the property.

Elderly / disabled homestead exclusion: (G.S. 105-277.1):

Allows 65+ and disabled homeowners with incomes below a certain level ($36,700 for 2024) to reduce the taxable value of their homes by the greater of $25,000 or 50%.

Low- & moderate-income housing (G.S. 105-278.6)

Creates both a complete exemption for low- and moderate-income housing owned by a non-profit and a deferral for the future site of such housing. A 2024 Court of Appeals case limits the exemption to the provision of both land and actual housing structures; if the non-profit provides only the land but requires residents to build or provide their own housing structures, the exemption will not apply.  Also note that low- and moderate-income housing owned by the government is fully exempt under G.S. 105-278.1.

Low-income housing appraisal method (G.S. 105-277.16)

Mandates a special appraisal method for property used for low-income housing that does not qualify for the above exemption due to ownership. Assessors must use the income appraisal approach, must take into consideration any applicable rent restrictions that affect the property’s income, and must not consider any income tax credits received by the owners of the property.

Retirement facilities (G.S. 105-278.6A):

Creates both full and partial exclusions for certain charitable retirement homes.

Other Exemptions Related to Community & Economic Development

Agricultural, horticultural, or forestry land (G.S. 105-277.3):

The present-use value (“PUV”) exclusion discussed above that creates deferred taxes for qualifying farms and forestry operations. See this post for more details.

Brownfields (G.S. 105-277.13):

Excludes a decreasing annual percentage of the taxable value of improvements to qualified brownfields.  The exclusion starts at 90% and decreases to 10% over five years. The property must be subject to a brownfields agreement between the owner and the N.C. Department of Environment and Natural Resources.

Charitable hospitals (G.S. 105-278.8):

A full exemption for non-profit charitable hospitals. See this post for more.

Charitable/educational/scientific/literary property (G.S. 105-278.6 and G.S. 105-278.7):

Two exemptions that cover a variety of non-commercial use of properties by non-profits. For a detailed discussion of the scope of these exemptions and how much commercial activity a non-profit may engage in before losing a property tax exemption, click here, here, here, or here. Note that the fact a property owner is a 501(c) entity exempt from federal income taxes does not automatically mean that the owner is also exempt from property taxes in North Carolina.

Development financing district agreement property appraisal (G.S. 105-277.11):

Mandates that property subject to a financing arrangement commonly known as “tax increment financing” be appraised at the greater of its true value or the minimum value as established in the financing agreement.

Government property (G.S. 105-278.1):

Property owned by a local government, the state of North Carolina, or (usually) the federal government is exempt from local property taxes regardless of how it is used. See this post for more.

Historic property (G.S. 105-278):

Another deferred tax exclusion, this one aimed at property designated as a historic landmark by a local government. The exclusion reduces the taxable value of the property by 50%, with the taxes on the difference in value deferred.  If the property loses its “historical significance” either due to a change in the applicable landmark ordinance or a change in the property, then three years of deferred taxes become payable.  No deferred taxes are due if the property suffers a fire or other natural disaster. For more details on the historic landmark process, click here and here.

Future sites of historic structures (G.S. 105-275(29a)):

Applies to land that lies within in a historic district, is owned by a historic preservation non-profit, and intended to be the future site of a historic structure that will be moved from another site.  This exclusion removes the entire value of the site from taxation but creates a deferred tax obligation on that value.  The deferred taxes are forgiven if a historic structure is moved to the site within five years of the property first receiving the exclusion. If that does not occur, all five years of deferred taxes are due and payable.

Native American Indian Land:

While casinos and related development might produce substantial economic activity for their region, all property both real and personal sited on land held in trust by the federal government for Native American Indian tribes is exempt.

Public parks (G.S. 105-275(7)):

A complete exemption for real and personal property owned by a non-profit and “appropriated exclusively” for public parks and drives.  It is not clear what it means for property to be “appropriated exclusively,” but it might require a restrictive deed covenant.

Site infrastructure land (G.S. 105-277.15A):

A deferred tax exclusion aimed at farmland ripe for development that is summarized in this blog post. This exclusion is rarely used, in part because of the new “builders inventory” exclusion mentioned above, which covers similar property and provides for an elimination of property taxes rather than a deferral.

Working waterfront property (G.S. 105-277.14):

Similar to the “present-use-value” exclusion available for farmland, this exclusion allows qualifying property to be valued for taxes at its present use for commercial fishing activities rather than its true value for development or other uses.  The taxes on the difference in value are deferred, with three years of deferred taxes becoming due if the property is no longer used for fishing activities.

The post Property Tax Exemptions for Community & Economic Development appeared first on Coates’ Canons NC Local Government Law.