How long should a homeowner be able to rent out his home and still count it as his main residence? Legislators are confronting that question this year as they consider a bill pushed by Sen. Ray Cleary of Murrells Inlet, who wants to let homeowners rent their homes out for more than 14 weeks a year and still be taxed at a lower rate than other rental properties.
Is this a good idea? Well, it seems at least innocuous enough. Cleary’s point that the change would help homeowners struggling with soaring insurance premiums, especially wind, is well taken. It’s an issue that sorely needs to be addressed and which we are following with interest in Columbia this year.
Cleary’s proposal addresses rental period length. The state already allows homeowners to rent our their homes for up to 14 days and maintain the lower 4 percent tax assessment ratio. The precedent has been set. Assuming we’re going to continue to charge permanent residents and others different tax rates – a continuing bone of contention for some – the question now is merely whether 14 days is too short. Sen. Cleary and others, including local Sens. Greg Hembree and Luke Rankin, are hoping to change that allowable period to 100 days.
Frankly, 100 days seems rather a long time for a home to be occupied by renters and yet still qualify as “owner-occupied.” In fairness, though, even at 100 days it could still be occupied by the owners almost three-quarters of the year.
Is this change really needed in order for homeowners to be able to make a profit on renting their homes for the summer? Well, not really. The court case that seems to have prompted this push came from Hilton Head Island, where a couple rented out their home for 91 days and were subsequently taxed at the higher 6 percent assessment ratio. They sued the Beaufort County assessor – and lost – but the numbers in the case are illuminating.
Gregory and Leslie Ford earned $76,500 from the rental of their home in the summer of 2008. According to Beaufort County property records, moving from the 4 percent to 6 percent ratio cost the Fords about an extra $7,500 in taxes on their $1 million home, equivalent to about nine days worth of renting. In other words, even after being taxed at a higher rate as a rental property, they still cleared almost $70,000 over the summer.
With much of the local support for the change coming from the oceanfront and the relatively higher-priced Pawleys Island area, we have little doubt that local residents would have much trouble securing similar profits that easily outweigh the higher taxes.
That being said, $7,500 is $7,500, and the change could result in a better benefit: bringing current scofflaws out of the shadows.
Talk to Realtors, county officials or neighbors and you’ll quickly learn that numerous homeowners are already renting their properties out for more than two weeks and simply not reporting it. The result: not only are they ducking the higher tax rate, but they’re also avoiding paying sales and accommodations taxes as they should. As a result, they can often offer lower rates than those owners following the rules, hurting those who actually follow the law.
“They are renting them now, they are just not paying and claiming all the taxes,” Lee Hewitt, co-owner at Garden City Realty, told The Sun News’ Dawn Bryant. “It does hurt our business. … Hopefully this will give them a way to help keep people in compliance.”
If this change will encourage more of those owners to step up and play by the rules, that would be good news for all concerned.
Meanwhile, during the Senate Finance Committee hearing on the bill last week there was also some confusion about what impact the proposal might have on an area’s index of taxpaying ability, the measurement of property values that’s used to set funding for the state’s school districts. By the end of the meeting, the consensus seemed to be that the change probably wouldn’t affect that funding, but lawmakers would be wise to make sure before voting.
While not having a great impact on local counties or tax collections, this bill is one of those that could make a real difference to some individuals. But we come back to the question posed at the beginning: How long should renting be allowed?
There’s nothing magical about 100 days. Realistically, most rentals are done by the week anyway, so 98 days (14 weeks) might be easier. What’s the best number? Your guess is likely as good as anybody else’s. Ninety days? Eight weeks? Six months? In the end, any number will be based mostly on gut feeling and intuition rather than hard data or facts, as nobody’s quite sure what effect any of this will have.
With that in mind, while the bill seems harmless enough if it passes as is, it would be a good candidate for a scheduled review a year or two down the road. Legislators would do well to gather feedback after any change to determine whether the new rules are functioning as imagined, listen to complaints and perhaps tweak the numbers in response. It might take a few cycles of attempts and reviews to find the best compromise. That’s fine. Crafting laws is hard work, and sometimes it takes a try or two to get it just right.