Will the Tax on That Newer South Dakota Property Go Up?

Why can the tax on a newer South Dakota property change?

South Dakota lets local governments phase in the taxable value of certain new construction. Under SDCL 10-6-137, a newly built structure is valued in the usual way, and the board of county commissioners can adopt a discretionary formula that decides how much of that assessed value is used for tax purposes in the years after construction. For most covered types, the formula can use all, part or none of the value in each of the five tax years following construction. After that period ends, the property is assessed like everything else.

For a buyer, the formula is a budget catch. If a property is currently getting a reduced value under a formula, the tax history you see reflects that reduction. The next few bills can be higher even if nothing about the property or the levy changes. A formula can also use the full value in some years, so ask what share applies now rather than assuming.

Cities can be involved too. The Department of Revenue’s fact sheet says cities can adopt formulas, including for some housing categories, and the law on redevelopment neighborhoods refers to both a county commission and a municipal governing body adopting a reduced value. So the same kind of property can be treated differently from one county or city to the next.

Can a formula on another property change your bill?

It can, through the school levies. SDCL 10-12-44 tells the county auditor to raise additional revenue for a school district’s general fund and special education fund to make up for a discretionary formula, with an additional levy on real property. The Department of Revenue’s fact sheet says the county auditor imposes that additional levy on all properties in the school district. You do not need to track your neighbors’ formulas, but it helps to know why a school levy can move.

If you are comparing towns on taxes generally, the guide to comparing property taxes across South Dakota communities covers the bigger picture. The rest of this guide stays on whether a specific property is partway through a phase-in.

Which properties can a formula cover?

SDCL 10-6-137 lists the structure types and a minimum value for each, and SDCL 10-6-143 and 10-6-144 add developer lots. These are the ones a home or acreage buyer is most likely to run into:

The current list leaves out an ordinary new single-family home that is not in a redevelopment neighborhood. If a seller tells you a newer house is “on the formula,” ask which category it falls under, which county or city resolution set it, and the year it started.

How the seven-year housing schedule works

For commercial residential, affordable housing and residential structures in a redevelopment neighborhood, SDCL 10-6-137.1 sets the schedule under the current law. The share of the new value that is taxed can be no more than 25 percent in the first or second year after construction is complete, no more than 50 percent in the third or fourth year, and no more than 75 percent in the fifth or sixth year, and it must be 100 percent in the seventh year and after. Have the county confirm which schedule applies to the specific property before you rely on these numbers. The Department of Revenue’s fact sheet shows the same schedule as 25-25-50-50-75-75-100.

So a home in year two of that schedule could be taxed on up to a quarter of its new value now, and on all of it five years later. That is the kind of jump to plan for.

Is the address inside a redevelopment neighborhood?

Under SDCL 10-6-137, the residential category applies only to an area defined and designated as a redevelopment neighborhood, and the Department of Revenue’s fact sheet lists the same requirement for that category. A house a few blocks away may sit outside the designated area, so ask the seller or the county which designation covers the exact address and get it in writing.

What about a new ag building on acreage?

This is the one acreage buyers should check. A new nonresidential agricultural structure, or an addition to one, can be covered if it has a full and true value of $10,000 or more. The Department of Revenue says that for non-residential structures, the governing body can choose any level of tax break for five years. The statute allows a formula to use all, any portion or none of the value in each of those years, and the fact sheet notes that some governing bodies use a 0-0-0-0-0 formula, which means the structure is tax free for the first five years.

That means a machine shed or barn that went up two years ago may be carrying only part of its value on the tax roll today. When the schedule runs out, the full value comes on. Under a 0-0-0-0-0 formula, that is a step from no tax on the building to tax on all of it, because the statute says the property is assessed like all other property once the five-year period ends. If you close near the end of a schedule, that step can land in your first year or two of ownership. If you are weighing a property with outbuildings, the guide to buying a South Dakota home with a detached shop covers the building questions. Add the tax question to that list.

What about a lot in a new subdivision?

Developer lots have their own formula option. Under SDCL 10-6-144, the county commission can adopt a formula for those lots covering any or all of five tax years. The Department of Revenue’s fact sheet lists the category as developer lots, covering land only, for five years. Ask the county when that five-year window started for the lot you are looking at.

If you buy a lot from a developer, ask the county director of equalization how the lot is classified now and how it will be assessed once you own it, and whether the tax history you are looking at reflects the developer lot formula. If you are deciding between building and buying, the comparison of new construction in southeast South Dakota covers the other trade-offs.

How do you check before you buy?

Start with the assessment. The Department of Revenue says the county director of equalization assesses all real property in the county, so that is the office that can tell you how a formula is affecting a specific parcel this year and what the full value is.

Here is a short list to work through during your inspection or due diligence period:

1. Ask the seller. Did any structure on the property get a discretionary formula, and which year of the schedule is it in? Ask about the house, any addition and every outbuilding, since each can be on its own schedule.
2. Call the county director of equalization. Ask how the property is classified, what its full assessed value is, and what share is currently used for tax.
3. Confirm the jurisdiction. Ask whether the formula came from the county or a city, and which resolution set it.
4. Get the paperwork. For a home in a redevelopment neighborhood, ask for the designation that covers the address.
5. Ask about the full-value tax. Ask the county auditor for the current levies so you can estimate the tax once the phase-in ends, and share that number with your lender.
6. Write down the years. Note the year each newer structure was finished and the year the formula started, so you can see when each step up lands. Keep that note with your closing papers for the first few tax seasons.

One more detail from the statute matters if you are buying from someone who built recently. The county commission may fully assess a structure without the formula if the owner asks. So two similar properties on the same road can be on different schedules, or on none at all. Compare each one’s assessment on its own instead of assuming the neighbor’s tax bill tells you much about yours.