1031 Exchange in South Carolina: I-290 Withholding, 44% Deduction and DSTs

Act 110 of 2026 rewrote South Carolina's brackets: what a 2026 seller defers

For tax years beginning after December 31, 2025, South Carolina taxes individuals in two brackets: 1.99% on taxable income below $30,000 and 5.21%, minus $966, on $30,000 and above, replacing the 2025 top rate of 6%. The Department of Revenue's Information Letter #26-20 describes the change under Act 110 of 2026, signed March 30, 2026, and the ratchet that begins in 2027: whenever the Board of Economic Advisors projects income tax collections growing at least 5%, the top rate drops, in steps that can continue to 1.99% and then toward zero.

South Carolina also keeps its deduction of 44% of net capital gain under SC Code 12-6-1150. The statute borrows the IRC §1222 definition, so the asset must have been held more than one year; applied to the 5.21% rate, the effective state rate on a long-term real estate gain is about 2.9%, which means the federal tax, not the state tax, is most of what a South Carolina seller defers.

Act 110 also decoupled South Carolina from the federal standard and itemized deductions, so taxable income now begins with federal AGI and a new South Carolina Income Adjusted Deduction. Gain deferred in an exchange never enters federal AGI, so it stays out of the South Carolina computation entirely.

Nonresident withholding under SC Code 12-8-580 and the intermediary workaround

When a nonresident individual, partnership, trust or estate sells South Carolina real estate, the buyer must withhold a percentage equal to the maximum individual tax rate of the gain stated on the seller's affidavit, or of the amount realized if no affidavit is given, capped at the net proceeds; corporations are withheld at 5%. Form I-290 tells the buyer to use the top marginal individual rate for the tax year of the sale, which for 2026 is 5.21%, and states that the net capital gain calculation is not taken into consideration in figuring withholding.

SC Revenue Ruling #09-13 sets out two options for a deferred exchange. Under Option 1 the seller pays the withholding from personal funds so all proceeds reach the intermediary, then amends the I-290 for a refund once the exchange closes. Under Option 2 the seller gives the buyer Form I-295 with box 16c marked to certify a §1031 intent, an I-290 completed as if the sale were taxable goes to the qualified intermediary with funds to cover it, and the buyer contracts with the intermediary to file and pay only if the transaction fails.

If the exchange succeeds, no I-290 is filed and nothing is sent to the Department; the buyer keeps the affidavit and the intermediary contract for audit. If it fails, payment is due by the 15th day of the month after the failure becomes apparent, meaning abandonment or the deadline passing, and a partly taxable exchange is reported on a modified I-290. South Carolina residents, and 'deemed residents' with two years of in-state business history, are not withheld at all.

The deed you sign resets the buyer's property tax: assessable transfers of interest

South Carolina values real property for tax as of the later of its 2007 base year, December 31 of the year an assessable transfer of interest occurs, or a countywide reassessment, and increases from countywide reassessment are capped at 15% over five years (SC Code 12-37-3140). A conveyance by deed is an ATI under 12-37-3150, so the relinquished property's value resets to market value for the buyer in the following tax year, and the 15% cap does not apply to that reset.

Transferring a majority interest (over 50%) in an entity holding the property, in one deal or a series within 25 years, is also an ATI and must be reported to the assessor within 45 days, with a civil penalty of up to $1,000 for silence. Investment property is assessed at 6% of value, owner-occupied residences at 4% and manufacturing at 10.5% under SC Code 12-43-220.

One relief exists for the buyer: SC Code 12-37-3135 exempts 25% of the ATI value for property taxed at the 6% ratio, provided the exemption value is not below the property's prior value and the owner notifies the assessor before January 31 of the first year claimed. For a seller the point is that the buyer will underwrite a new, higher bill; for an exchanger acquiring South Carolina property the point is to file that notice on time.

Deed recording fee of $1.85 per $500, owed by the seller

South Carolina charges a deed recording fee rather than a transfer tax: $1.85 for each $500 of value or fraction, split $1.30 to the state and $0.55 to the county under SC Code 12-24-10 and 12-24-90. The fee is the liability of the grantor, with the grantee secondarily liable, and it is paid when the deed is recorded, so it is a seller's cost on the relinquished property and a buyer's concern only by contract.

On a $2,000,000 sale the fee is $7,400. Transfers to a partnership, corporation or trust where the only consideration is an interest in the entity are exempt under 12-24-40, which matters when investors restructure title ahead of an exchange, but a sale to an unrelated buyer pays the full fee, and an exchange changes nothing about it.

No claw-back and no deferred-gain tracking in South Carolina

South Carolina requires no reporting of gain deferred into out-of-state replacement property and imposes no claw-back when that property is later sold. A nonresident who completes the I-295 and I-290 process and files a final SC1040 for any recognized boot is finished with the state; a resident goes on reporting everything, DST distributions included, at the two-bracket rates.

Conformity rests on SC Code 12-6-40, which adopts the Internal Revenue Code as amended through a date the legislature updates each year (December 31, 2024 under 2025 Act 63), and Revenue Ruling #09-13 expressly lists like-kind exchanges that are tax deferred under §1031 among transactions that are not 'sales' subject to withholding. The eligibility rules themselves are federal; see 1031 eligibility requirements.