What Is the South Carolina Capital Gain Exclusion?

The South Carolina capital gains exclusion lets individuals, estates, and trusts deduct 44% of their net long-term capital gains from state taxable income. You claim it on your SC1040 by multiplying your net capital gain by 44% and entering the result on the designated deduction line. Because only 56% of the gain remains taxable, the effective state rate on long-term gains works out to roughly 3.36% at South Carolina’s 6% top rate for 2025.¹

What Gains Qualify

The deduction applies to “net capital gain” as defined by Internal Revenue Code Section 1222: your net long-term capital gains for the year minus any net short-term capital losses.² The holding period matches the federal standard. You must have held the asset more than one year. Short-term gains are taxed at your regular state income tax rate with no deduction.

Gains that commonly qualify:

Stocks, bonds, and mutual funds held longer than a year.
Investment real estate, rental property, and land held for appreciation.
Partnership interests, S corporation shares, and LLC membership interests, when the gain is classified as long-term capital gain rather than ordinary income.
Section 1231 business-use assets such as equipment and commercial real estate, where the net gain is treated as long-term capital gain under federal rules.
Capital gains reported under the installment method, as long as the underlying asset met the holding period requirement.³

Primary Home Sales

South Carolina follows the federal exclusion under IRC Section 121, which lets you exclude up to $250,000 of gain on your primary residence ($500,000 for married couples filing jointly) if you owned and lived in the home for at least two of the five years before the sale.⁴ Any gain above the federal cap flows into South Carolina taxable income, and the 44% deduction applies to that remaining portion.

Inherited Property

Inherited assets get a stepped-up basis under federal law, which often eliminates or reduces the taxable gain. If a beneficiary sells the asset more than one year after the decedent’s death, the gain qualifies for the 44% deduction. A sale within one year of the death does not qualify.

What’s Carved Out

Any portion of a gain that federal rules treat as ordinary income is excluded from the deduction. The most common example is depreciation recapture on a rental property: the gain attributable to depreciation you previously claimed is taxed as ordinary income and gets no 44% break. Only the piece reported as long-term capital gain on your federal return qualifies.

Who Can Claim It

The deduction is available to South Carolina residents, part-year residents with South Carolina-sourced gains, estates, and trusts. Residency turns on domicile under South Carolina Code 12-6-30, which considers voter registration, driver’s license, property ownership, and where you file resident tax returns.⁵

Part-Year Residents

If you moved into or out of South Carolina during the year, you choose between filing as a full-year resident with a credit for taxes paid to another state, or filing as a nonresident for the portion of the year you lived elsewhere. Gains from South Carolina real estate are always sourced to the state regardless of residency, while gains from stocks and other intangibles follow your domicile.⁶ The 44% deduction applies to any net long-term capital gain included in your South Carolina taxable income. If a gain isn’t in that income, there’s nothing to deduct against.

Active-Duty Military

Service members stationed in South Carolina do not become residents by virtue of military orders. Under the Servicemembers Civil Relief Act, your tax domicile stays in your home state unless you take deliberate steps to change it. The same protection extends to military spouses.

Estates, Trusts, and Pass-Throughs

Estates and trusts can claim the 44% deduction on net long-term capital gains taxed at the entity level or passed through to individual beneficiaries. It does not apply to gains passed through to beneficiaries that aren’t individuals, such as corporate beneficiaries.²

Partners and S corporation shareholders report their share of South Carolina-sourced capital gains on their individual returns and apply the 44% deduction there. For entities that elect to be taxed at the entity level under South Carolina Code 12-6-545, only active trade or business income is taxed to the entity. Capital gains are excluded from that election and still pass through to the individual owners.⁷ Nonresident partners and shareholders can claim the deduction on the long-term capital gain portion of their South Carolina taxable income.

What the Deduction Saves You

Because the deduction removes 44% of your net long-term capital gain from state taxable income, you pay tax only on the remaining 56%. South Carolina’s top individual income tax rate was 6% for 2025, down from 6.2% in 2024, 6.4% in 2023, and 6.5% in 2022. Brackets are adjusted for inflation each year.¹

At the 2025 top rate, the effective state tax on long-term capital gains is about 3.36%. On a $200,000 long-term gain, the deduction pulls $88,000 out of taxable income and saves roughly $5,280 in state tax at the top rate. That reduction is on top of the federal preference for long-term capital gains.

How to Claim It on the SC1040

Start with your federal return. You calculate total capital gains on Schedule D (Form 1040) and carry the results to your Form 1040. South Carolina uses those federal figures as the starting point.

On the SC1040, a specific line (Line i in the 2025 instructions) is designated for the net capital gain deduction. Multiply your net capital gain by 44% and enter the result. Net capital gain here is the excess of your net long-term capital gain over your net short-term capital loss for the year. The deduction reduces your South Carolina taxable income before the tax is calculated.³

Keep your records organized. The SCDOR may ask for brokerage statements, closing documents, K-1 forms, or depreciation schedules depending on the type of gain. Claims without proper documentation can be disallowed.

If you use tax software, confirm that it calculated the 44% deduction. Some programs apply it automatically when they detect South Carolina residency and net long-term capital gains, but verifying the line entry is worth the minute it takes.

If the Department Denies the Deduction

The SCDOR may disallow the deduction for insufficient documentation, misclassification of short-term gains as long-term, or inclusion of ordinary income amounts such as depreciation recapture. The department sends a formal notice explaining the basis for the denial. Some denials can be resolved by filing an amended return with better documentation.

If you want to contest the denial, you have 90 days from the date of the department’s decision or proposed assessment to file a written protest explaining your position with supporting documents. The SCDOR can extend that deadline if you request an extension before the 90 days expire.⁸ If internal review doesn’t resolve the dispute, you can take it to the South Carolina Administrative Law Court for an independent hearing.

The SCDOR generally has 36 months from the date a return was filed (or due to be filed, whichever is later) to assess additional tax. That window extends to 72 months if the return understated total tax by 20% or more, or in cases of fraudulent intent.⁹ Keep your records at least three years after filing, and longer when a large capital gain made the deduction worth a meaningful amount. If a holding period or classification is ever questioned, the original purchase documentation is what settles it quickly.

1
South Carolina Department of Revenue. Individual Income Tax
2
South Carolina Legislature. South Carolina Code 12-6-1150 – Net Capital Gain, Deduction From Taxable Income for Individuals, Estates, and Trusts
3
South Carolina Department of Revenue. SC1040 Individual Income Tax Instructions
4
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
5
South Carolina Legislature. South Carolina Code 12-6-30 – Definitions
6
South Carolina Legislature. Code of Laws – Title 12, Chapter 6 – Section 12-6-1710
7
South Carolina Department of Revenue. SC Revenue Ruling 22-5
8
South Carolina Legislature. South Carolina Code 12-60-450 – Appeal of Proposed Assessment, Contents of Written Protest
9
South Carolina Legislature. South Carolina Code 12-54-85 – Time Limitation for Assessment of Taxes or Fees, Exceptions