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Tax Law Changes

August 27, 2014

Local Privilege License Taxes
NC REALTORS® backed a proposal to eliminate local privilege license taxes that was included in the omnibus tax bill, HB 1050.

NC REALTORS® surveyed Brokers-In-Charge before the session and found that 40 percent of real estate firms pay this tax to their local government as a flat fee or percentage of gross receipts. The bill passed both chambers and was signed into law on May 29, 2014. Local privilege license taxes are prohibited effective July 1, 2015.

Accommodations Taxes
The NC Department of Revenue issued an Important Notice on May 30 regarding the rental of private residences, cottages, or similar accommodations. Due to confusing wording, the Notice created an impression that the General Assembly created a new tax on rental accommodations. This is not the case.

For 30 years, North Carolina has applied the state sales tax to the gross receipts derived from the rental of accommodations. The law requires real estate brokers who act as rental agents for accommodations subject to the tax to be liable for collecting and remitting the tax, unless the rental is long-term (i.e., rented to the same person for a period of 90 days or more). Brokers are also responsible for collecting and remitting applicable local sales and occupancy taxes.

Private residences or cottages rented by the property owner for fewer than 15 days in a calendar year are excluded from the sales tax, unless:

  • The residence or cottage is generally and routinely made available by the owner for rental; or

  • The property is listed with a broker acting as a rental agent.

In June 2012, the Department issued an Important Notice that was later determined to be an erroneous interpretation of the law. The notice excluded from the sales tax private residences that are rented for fewer than 15 days in a calendar year even when the property is listed with a broker acting as a rental agent.

Earlier this year, the Department concluded that the June 2012 notice did not reflect the intent of the law and requested that the General Assembly provide clarifying legislation.

On May 29, Governor McCrory signed into law HB 1050. The new law includes a provision that more accurately states what had already been longstanding law in North Carolina: Real estate brokers acting as rental agents for private residences or cottages rented for fewer than 15 days in a calendar year are required to collect and remit the state sales tax as well as local sales and occupancy taxes. HB 1050 became effective on June 1, 2014, and applies to accommodation rentals occupied after that date.

2013 State Tax Reform
The NCGA took on the monumental task of reforming the state's tax code during its 2013 legislative session. Like NC REALTORS®, legislators are compelled to ensure North Carolina is an attractive place to live and work in for many years to come.

On Wednesday, July 17, the NCGA gave final approval to tax reform legislation, and Governor Pat McCrory signed a final tax reform bill into law on July 23, 2013.

The Tax Simplification and Reduction Act--House Bill 998--allows filers to take a standard deduction ($15,000 for married taxpayers filing jointly, $12,000 for head-of-household filers and $7,500 for single and married taxpayers filing separately) or to itemize their deductions with a combined cap on mortgage interest and property tax deductions of $20,000 for all filers.

The initial plan discussed by Senator Bob Rucho (Mecklenburg) would have eliminated corporate income taxes and reduced personal income taxes with the hope of eventually eliminating those as well. The original plan included the following:

  • A statewide transfer tax on real property of 1 percent

  • Taxing all goods and services at 8.05 percent

  • Repealing the current franchise tax and creating a new Business License Tax that would have included all business entities, including LLCs. This asset-based tax did not take into account a company's actual profitability and would have affected the greater of $500/year or 1-1.25 percent of the company assets annually.

As the months progressed and discussions continued, elected officials began to focus on the complete elimination of federal deductions—including mortgage interest and property tax deductions—as one way to in effect lower income tax rates.

NC REALTORS® will remain diligent and watchful. The fight does not end here. Moving ahead, NC REALTORS® intends to continue pressing for removal of the deductions' cap for the betterment of North Carolina as well as continue to fight against sales tax on services and a statewide transfer tax.

 

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