TL;DR: South Carolina offers a capital gains deduction for long-term gains on your state income tax return — a meaningful benefit for home sellers. But the mechanics differ from the federal exclusion, and nonresident sellers face additional withholding requirements at closing. Understanding how these layers interact can help you plan your sale more effectively.
Selling a Home in South Carolina? The State Tax Picture Is More Nuanced Than You Think
Most sellers know the federal rule: if you've lived in a home for two of the last five years, you may exclude up to $250,000 in gain from federal income tax — $500,000 for married couples filing jointly. But many sellers, particularly those who've owned Myrtle Beach properties for a decade or more, have gains that exceed those thresholds. Others own investment properties or second homes that don't qualify for the primary residence exclusion at all.
That's where South Carolina's capital gains treatment becomes relevant. The state doesn't simply mirror federal tax law when it comes to investment gains. It has its own deduction structure for long-term capital gains — one that can reduce your effective state tax burden on a home sale. Understanding what it covers, who qualifies, and how it interacts with SC's withholding rules at closing is essential planning for any seller in the Grand Strand market.
Importantly, tax rules apply to both resident and nonresident sellers. And with the Coastal Carolinas Association of REALTORS® (CCAR MLS, April 2026) reporting a median single-family sales price of $368,000 in the region as of April 2026, many sellers are walking away with gains large enough to make state tax planning matter.
How South Carolina Taxes Capital Gains From Real Estate
South Carolina taxes capital gains as ordinary income under its individual income tax system. Gains from the sale of real property are reported on your SC1040 — the state's individual income tax return — regardless of whether you also owe federal tax on the same gain.
However, South Carolina provides a deduction for long-term capital gains. According to the South Carolina Department of Revenue (SCDOR), qualifying long-term gains are eligible for a 44% deduction before the remaining amount is taxed at your SC marginal income tax rate. In practical terms, this means only 56% of a qualifying long-term gain is subject to state income tax.
What makes a gain "long-term" for SC purposes? The holding period requirement follows the same standard used federally: you must have held the asset for more than one year before selling. Real estate held for more than 12 months at the time of sale generally qualifies.
The deduction applies to net long-term capital gains — that is, the gain after subtracting your adjusted basis, selling costs, and any allowable exclusions (such as the federal primary residence exclusion, if applicable). Sellers should work with a licensed tax professional to calculate their adjusted basis accurately, since elements like capital improvements, prior depreciation, and acquisition costs all factor into the final gain figure. Consult a licensed CPA or tax attorney for guidance specific to your situation.
What SC's Top Marginal Rate Means for Your Remaining Gain
After applying the 44% long-term capital gains deduction, the remaining 56% of your gain is taxed at your SC individual income tax rate. South Carolina has a flat top marginal rate — currently set at 6.2% for tax year 2026 under SC H. 4216, per the SC Legislature — though rate reductions enacted by the General Assembly have been phasing down gradually.
For illustration purposes only: a seller with a $200,000 qualifying long-term gain would first apply the 44% deduction, reducing the taxable gain to $112,000. That $112,000 would then be taxed at the applicable SC rate. This is a simplified example — your actual liability will depend on your full tax picture, filing status, deductions, and other income.
The effective rate on the full $200,000 gain in this scenario is notably lower than the headline state rate — which is the intent of the long-term capital gains deduction. South Carolina's treatment is more favorable than many states that tax capital gains as straight ordinary income with no deduction.
Sellers should also consider whether the federal 3.8% Net Investment Income Tax (NIIT) applies to their situation. The NIIT applies to net investment income, including capital gains, for taxpayers above certain modified adjusted gross income thresholds. This is a separate federal calculation, not a state one, but it can affect the overall tax picture for higher-income sellers. See IRS Topic No. 559 for NIIT thresholds.
Nonresident Sellers and SC's Withholding Requirement at Closing
If you are a nonresident of South Carolina selling property here — which applies to many Myrtle Beach second-home and investment property sellers — you face an additional step at closing: the SC nonresident real estate withholding requirement.
Under SCDOR rules, the buyer (or their closing agent) is required to withhold a portion of the sale proceeds and remit it to the SCDOR on behalf of the nonresident seller. According to SCDOR Form I-290 instructions (Rev. 7/17/23), the withholding amount is calculated based on either the gain (if the seller provides a signed I-295 affidavit) or the amount realized — and is multiplied by South Carolina's top marginal individual income tax rate for the tax year of the sale.
This withholding is not a final tax — it is a prepayment. Once you file your SC1040, you report the capital gain, apply any applicable deductions (including the long-term capital gains deduction), and claim credit for the amount withheld. If withholding exceeds your actual SC tax liability, you may be entitled to a refund.
Key practical points from the I-290:
The withholding payment is due to the SCDOR by the 15th of the month following the month of sale.
Sellers who provide an I-295 affidavit can limit withholding to the amount of recognized gain rather than the full amount realized — which can significantly reduce what's held at closing.
If the amount that would be withheld for the year is less than $350, withholding on installment sales is not required.
Resident sellers are not subject to this withholding requirement but still owe SC income tax on any taxable gain when they file their annual return.
SC Capital Gains Deduction vs. Federal Exclusion: Understanding the Difference
These are two separate tax benefits, and confusing them is one of the most common seller mistakes.
State Tax Treatment Table — SC Capital Gains Deduction Overview
| Feature | Federal Primary Residence Exclusion | SC Long-Term Capital Gains Deduction |
|---|---|---|
| Who qualifies | Primary residence (2-of-5-year use/ownership test) | Any seller with long-term gain (held 1+ year) |
| What it covers | Excludes up to $250K/$500K of gain entirely | Deducts 44% of qualifying net long-term gain |
| Applies to investment/second homes | No | Yes, if held more than one year |
| Governs which tax | Federal income tax | SC individual income tax |
| Where claimed | Federal Form 1040 / Schedule D | SC1040 individual income tax return |
Source: SCDOR I-290 Instructions (Rev. 7/17/23); SCDOR Capital Gains Deduction guidance, dor.sc.gov; IRS Publication 523 (primary residence exclusion rules). Consult a licensed tax professional for your specific situation.
Both benefits can apply in the same transaction. A seller of a primary residence who qualifies for the federal exclusion may still have remaining taxable gain at the state level — and the SC long-term deduction would apply to that remaining amount.
Why This Matters for Myrtle Beach Sellers in 2026
The Grand Strand has seen significant price appreciation over the past several years. According to CCAR MLS data (April 2026), the median single-family sales price in the region reached $368,000 as of April 2026 — and average sale prices hit $464,585 that same month. Sellers who purchased properties five, ten, or fifteen years ago may be sitting on gains that extend well beyond the federal exclusion limits.
For those sellers, the SC 44% capital gains deduction on the gain above the federal exclusion threshold can represent a meaningful reduction in state tax liability — potentially thousands of dollars. Understanding this benefit early in the selling process allows time to gather supporting documentation, consult a tax advisor, and make informed decisions about timing.
Whether you're selling a primary residence in Carolina Forest, an investment property in Garden City, or a second home anywhere across Horry County, the tax picture benefits from early planning. The SC deduction doesn't happen automatically — it requires accurate gain calculations and correct reporting on your SC1040.
If you're planning a home sale in the Myrtle Beach area and have questions about the local market, how the current inventory environment might affect your pricing strategy, or how to find experienced professionals who understand this market, the team at Carolina Crafted Homes is a good starting point. Reach out to us here and we'll connect you with the local knowledge you need.
FAQ SECTION
Does South Carolina tax capital gains from real estate sales?
Yes. South Carolina taxes capital gains as ordinary income on the SC1040 individual income tax return. However, the state allows a 44% deduction on net long-term capital gains — that is, gains from assets held more than one year. This deduction reduces the portion of the gain that is subject to the SC marginal income tax rate. The deduction is separate from the federal primary residence exclusion, which may also reduce or eliminate federal taxes owed. Consult a licensed tax professional to understand how these interact in your specific situation.
What is the SC 44% capital gains exclusion, exactly?
It's a state-level deduction — technically called a capital gains deduction — that allows South Carolina taxpayers to subtract 44% of their net long-term capital gain from their taxable income on their SC1040. The remaining 56% of the qualifying gain is then taxed at the applicable SC individual income tax rate. This applies to gains from real estate held more than one year, including investment properties and second homes. It is not the same as the federal home sale exclusion, which applies only to primary residences under specific conditions.
If I already qualify for the federal home sale exclusion, do I need to worry about SC taxes?
Possibly. The federal primary residence exclusion ($250,000 for single filers, $500,000 for married couples filing jointly) reduces your federal taxable gain. But if your total gain exceeds those thresholds, the amount above the exclusion limit may still be taxable at both the federal and state levels. South Carolina's 44% long-term deduction applies to the state portion of that remaining gain. Sellers with large appreciation — common among long-term Grand Strand property owners — should confirm their full tax picture with a CPA before listing.
I'm a nonresident selling a Myrtle Beach property. What is withheld at closing?
If you are not a South Carolina resident, the buyer or closing agent is required by law to withhold a portion of your sale proceeds at closing and remit it to the SCDOR. Per SCDOR Form I-290 (Rev. 7/17/23), the withholding is calculated based on either the gain (if you provide a signed I-295 seller affidavit) or the full amount realized, multiplied by SC's top marginal individual income tax rate. This is not a final tax — it's a prepayment that you reconcile when you file your SC1040. Providing an I-295 can significantly reduce the amount withheld.
Does the 44% deduction apply to investment properties, or only primary residences?
The SC long-term capital gains deduction is not limited to primary residences. It applies to net long-term capital gains from any qualifying asset held more than one year — including investment properties, rental properties, and second homes. This is a key distinction from the federal exclusion, which is restricted to primary residences under the two-of-five-year use test. For sellers of vacation rentals or second homes along the Grand Strand, the SC deduction may be one of the few significant state tax benefits available on the sale. Confirm eligibility with a licensed tax advisor.
When is the best time to consult a tax professional about a home sale in SC?
Before you list, not after. The timing of a sale, your adjusted basis calculation, the potential applicability of the federal exclusion, depreciation recapture on investment properties, and SC withholding requirements all benefit from early planning. Tax advisors can help you document capital improvements, evaluate whether a 1031 exchange might apply, and ensure your SC return is filed correctly. By the time you're under contract, your options are limited — advanced planning gives you more flexibility.
Sources
South Carolina Department of Revenue — Nonresident Real Estate Withholding (Form I-290 Instructions, Rev. 7/17/23): https://dor.sc.gov/forms-site/Forms/I290.pdf
South Carolina Department of Revenue — Capital Gains Deduction Guidance: https://dor.sc.gov/
SC Legislature — Individual Income Tax (§ 12-6-510 / H. 4216): https://www.scstatehouse.gov/
IRS Publication 523 — Selling Your Home (primary residence exclusion): https://www.irs.gov/publications/p523
IRS Topic No. 559 — Net Investment Income Tax: https://www.irs.gov/taxtopics/tc559
Coastal Carolinas Association of REALTORS® MLS — Monthly Indicators, April 2026: https://www.ccarsc.org/pages/marketstats/
Capital gains tax on home sales in South Carolina — 2026 guide
How to avoid capital gains tax on a South Carolina home sale
Selling a second home in South Carolina: Tax considerations for 2026
