Navigating Capital Gains Taxes When Selling a Home in South Carolina

Selling your home in South Carolina this year? Navigating capital gains taxes gets easier once you separate the two systems at work: the federal exclusion and the state’s own deduction. Most sellers who lived in their home for at least two years owe little or nothing at all.

Mack & Mack Attorneys has worked through real estate closings in the Fort Mill area across four generations, catching problems before they cost you money.

Key Takeaways

• Single filers can exclude up to $250,000 of home sale gain from federal tax, and married couples up to $500,000, if they meet the ownership and use tests.
• South Carolina deducts 44 percent of your long-term gain before taxing what’s left at the state’s top rate.
• Nonresident sellers face automatic withholding at closing under state law.
• Your real gain depends on your adjusted basis and improvements, not your sale price alone.

What Counts as a Capital Gain on a Home Sale?

Your capital gain isn’t your sale price. It’s your sale price minus your adjusted basis – what you paid for the house plus qualifying capital improvements like a new roof or an added bathroom. Sell a home you bought for $250,000 for $450,000 after $30,000 in upgrades, and your taxable gain starts at $170,000, not $200,000.

How the Federal Home Sale Exclusion Works?

Under Section 121 of the tax code, you can exclude up to $250,000 of gain as a single filer or $500,000 if married filing jointly, as long as you owned and lived in the home as your main residence for at least two of the five years before the sale, per the exclusion described in IRS Topic 701. Three things determine eligibility:

1. The ownership test, meeting the two-year minimum.
2. The use test, living there as your main home.
3. The frequency limit, no other exclusion claimed in the past two years. Gain above those limits is taxed at long-term capital gains rates, and high earners may also owe the federal net investment income tax of 3.8 percent.

South Carolina’s 44 Percent Long-Term Gain Deduction

Any gain surviving the federal exclusion still faces South Carolina income tax, but the state is kinder than most. Under the 44 percent capital gains deduction, individuals deduct 44 percent of net long-term gain before the remainder is taxed at the state’s top rate. A $100,000 leftover gain, held more than a year, gets taxed on just $56,000 of it.

Nonresident Sellers and Withholding at Closing

If you no longer live in South Carolina, the buyer’s closing attorney must withhold state tax from your proceeds under nonresident withholding rules, reported on Form I-290. That withholding is based on gain or sale price, not your final tax bill, so the real number gets settled when you file.

Attorney William R. Reigel Jr, also a state-licensed title insurance producer with a background in mortgage compliance, reviews these gain calculations from both sides of the closing – catching basis errors most sellers never think to check.

Frequently Asked Questions

Do I have to report the sale if my entire gain is excluded?

Generally no, but if you received Form 1099-S you must report the sale even when the gain is fully excluded, per IRS Publication 523. Keep your closing statement in case the IRS asks for it later.

What happens if I sell before living in the home two years?

You may still qualify for a partial exclusion if the sale was tied to a job change, health issue, or another unforeseen circumstance recognized by the IRS. The exclusion amount is prorated based on how much of the two years you actually met.

Does South Carolina tax the same gain the IRS excludes?

No. South Carolina only taxes gain remaining after the federal exclusion, then reduces that remainder by 44 percent if it qualifies as long-term. Most sellers with a fully excluded federal gain owe the state nothing on the sale.

How is nonresident withholding calculated?

The buyer’s closing attorney withholds a percentage of either your recognized gain or the full sale price, depending on documentation provided at closing. You reconcile the actual amount owed when you file your South Carolina return.

Mack & Mack Attorneys: Your South Carolina Real Estate Law Firm

Figuring out what you actually owe on a home sale shouldn’t require guessing. Our closings run through attorneys who verify basis, exclusions, and withholding calculations before money changes hands, not after a tax bill arrives.

Whether you’re selling a longtime residence or an inherited property, getting the numbers right before closing protects you from an unpleasant surprise in April. Contact our firm today.

How Mack & Mack Attorneys Can Help

If you are dealing with a matter in SC, acting early protects your options. Contact us today to talk through your situation.