A Comprehensive Guide to Capital Gains Tax in South Carolina

Capital gains tax is one of the most important factors to consider when selling a property, stocks, or other assets in South Carolina. Many homeowners and investors are often surprised by how much this tax can affect their overall profit if they are not prepared. Understanding how capital gains tax in SC works allows you to plan ahead, reduce your liability, and maximize your earnings from a sale.

This comprehensive guide breaks down everything you need to know about capital gains tax in South Carolina, including the rates, exemptions, and strategies to reduce your tax burden. Whether you are a homeowner, real estate investor, or simply planning to sell an asset in the future, this guide will help you navigate the process with confidence.

What Is Capital Gains Tax?

Capital gains tax is the tax you pay on the profit made from selling an asset. The “gain” is the difference between the purchase price (your basis) and the selling price.

For example:

• If you purchased a property in Charleston for $200,000 and sold it for $300,000, your capital gain is $100,000.

• Depending on how long you held the property, this gain could be classified as short-term or long-term and taxed accordingly.

Capital Gains Tax in South Carolina: An Overview

South Carolina follows the federal guidelines for capital gains taxation but has its own state-specific rules. Here’s how it works for Redhead Home Properties

• Federal Capital Gains Tax: The IRS determines your federal rate based on your income level and how long you held the asset.

• South Carolina State Tax: The state allows taxpayers to deduct 44% of their net capital gain. This means that only 56% of the gain is subject to state income tax.

This combination of federal and state rules makes South Carolina relatively favorable compared to other states with higher tax burdens.

Short-Term vs. Long-Term Capital Gains

Short-Term Capital Gains

Short-term gains apply if you sell an asset you’ve owned for one year or less. These gains are taxed as ordinary income, meaning they are subject to your regular income tax bracket both federally and at the state level.

For example:

• If your annual income is $70,000 and you sold a property in Greenville after 10 months with a $20,000 profit, that $20,000 is added to your income and taxed accordingly.

Long-Term Capital Gains

Long-term gains apply if you’ve owned the asset for more than one year. These are taxed at lower rates federally (0%, 15%, or 20%) depending on your income level. In South Carolina, you still benefit from the 44% deduction before applying state income tax.

Example:

• If you sold a Columbia rental property after 5 years and made a $100,000 profit, only $56,000 would be subject to South Carolina income tax after the 44% deduction.

South Carolina Capital Gains Tax Rate

The effective tax rate depends on both federal and state rules. Let’s break it down:

Federal Long-Term Capital Gains Rates (2025)

• 0%: For single filers with taxable income up to $47,025 (married couples up to $94,050).

• 15%: For incomes between $47,026 and $518,900 (married couples up to $583,750).

• 20%: For incomes above these thresholds.

South Carolina State Tax

• The state income tax ranges from 0% to 6.5%.

• With the 44% deduction, your effective tax rate is significantly reduced.

Example:
If your state tax rate is 6.5% and you earned a $50,000 long-term capital gain, only $28,000 (56% of the gain) would be taxed, resulting in an effective rate of around 3.64%.

Capital Gains Tax and Real Estate in South Carolina

Real estate sales often trigger capital gains tax, but there are several special rules and exemptions you should know about.

Primary Residence Exemption

If you are selling your primary residence, you may qualify for the federal home sale exclusion:

• Up to $250,000 of profit is excluded from capital gains tax if you are single.

• Up to $500,000 is excluded if you are married filing jointly.

To qualify, you must have lived in the property for at least two of the last five years before the sale.

Example:
If you bought a home in Charleston for $200,000, lived there for 10 years, and sold it for $600,000, you could exclude $500,000 of the gain (if married filing jointly), meaning you’d owe no federal capital gains tax.

Investment and Rental Properties

Investment properties do not qualify for the primary residence exemption. However, you can still use strategies such as a 1031 Exchange to defer taxes.

How a 1031 Exchange Helps Avoid Capital Gains

A 1031 Exchange allows you to defer paying capital gains taxes by reinvesting the proceeds from the sale of one investment property into another.

Key rules include:

• The replacement property must be of equal or greater value.

• You must identify the replacement property within 45 days of the sale.

• The transaction must be completed within 180 days.

Example:
You sell a Myrtle Beach rental property for $400,000 and reinvest the profit into another rental property in Hilton Head. By using a 1031 Exchange, you defer paying taxes on your gains.

Strategies to Reduce Capital Gains Tax in South Carolina

There are several legal ways to minimize your tax liability:

• Time Your Sale: Hold assets for more than a year to qualify for lower long-term rates.

• Use the Primary Residence Exemption: Sell a home you’ve lived in for two out of the last five years.

• 1031 Exchange: Defer taxes on investment property sales.

• Offset with Losses: Sell underperforming assets in the same year to offset gains.

• Consider Installment Sales: Spread out payments over multiple years to avoid a large one-time tax burden.

Real-Life Example: Selling a Home in Charleston

Imagine John and Sarah bought a home in Charleston in 2010 for $250,000. In 2025, they decide to sell the property for $600,000.

• Profit (Capital Gain): $350,000

• Because it was their primary residence and they are married filing jointly, they qualify for the $500,000 exclusion.

• Result: They owe no federal capital gains tax and only a reduced state tax on the portion above the exemption if applicable.

This shows how homeowners can save significant money by planning ahead.

Penalties for Not Reporting Capital Gains

Failing to report capital gains can lead to serious consequences, including:

• IRS penalties and interest charges.

• State-level penalties in South Carolina.

• Increased risk of audit.

Always make sure to properly report your gains when filing taxes.

Capital Gains Tax Planning for Retirees in SC

South Carolina is a popular retirement destination because of its tax-friendly policies. Retirees can benefit from reduced state taxation on long-term capital gains, along with other retirement tax breaks.

For example, retirees may qualify for additional deductions on retirement income, making South Carolina even more favorable for selling investment properties later in life.

Common Misconceptions About Capital Gains Tax

• Myth: Only the wealthy pay capital gains tax.
  Fact: Anyone selling a home, stock, or other asset at a profit may owe taxes.

• Myth: Capital gains tax only applies to real estate.
  Fact: It also applies to stocks, bonds, and other investments.

• Myth: You can always avoid capital gains tax.
  Fact: While there are exemptions and strategies, most investors will pay some form of tax unless they qualify for exclusions or use a 1031 Exchange.

FAQs About Capital Gains Tax in South Carolina

1. What is the capital gains tax rate in South Carolina?

South Carolina allows a 44% deduction on net long-term capital gains, which reduces the effective state tax rate to about 3.64% at the highest bracket.

2. Do I have to pay capital gains tax on my primary residence in SC?

Not necessarily. If you meet the IRS exclusion rule of $250,000 (single) or $500,000 (married), you may avoid federal tax. State tax may still apply on gains above those limits.

3. How can I avoid capital gains tax when selling a rental property?

You can use a 1031 Exchange to defer taxes by reinvesting in another investment property.

4. What is the difference between short-term and long-term gains?

Short-term gains (assets held for less than a year) are taxed as ordinary income, while long-term gains (assets held for more than a year) benefit from lower tax rates.

5. Does South Carolina tax retirement-related capital gains differently?

No, but retirees may benefit from other state tax deductions that reduce overall taxable income.

6. What happens if I don’t report capital gains on my taxes?

You may face penalties, interest charges, and potential audits from the IRS and South Carolina Department of Revenue.

Conclusion

Capital gains tax in South Carolina may seem complicated at first, but with the right knowledge and planning, you can minimize your tax liability and keep more of your profits. Understanding exemptions, using tools like a 1031 Exchange, and timing your sale strategically can make a significant difference.

Whether you’re selling your primary home in Charleston, a rental property in Greenville, or simply cashing in on an investment, knowing how capital gains tax works will help you make informed decisions. For property owners looking to maximize returns and reduce tax burdens, working with professionals like Redhead Home Properties ensures you stay on the right track.