Did you ever move into a place, get your tax bill and wonder why you were paying more property taxes than your neighbors?
Have you lived in your home awhile and wonder why you are paying higher taxes than people who just moved in?
The reason why is called Homestead (also called “Save Our Homes” or “Amendment 10″).
Here’s how it works:
For example, a person buys a house and “homesteads” it.
Homesteading signifies that it is their primary residence.
Homesteading gives a homeowner tax advantages (and some advantages against creditors as well).
One of the tax advantages of homesteading is that it currently exempts $50,000 off the assessed value of a home.
So if I buy a house today for $200,000 and homestead it, the assessed value will be stay the same, but since I get to exempt $50,000 for the homestead, my taxable value becomes $150,000.
In this example the homestead exemption saves me about $750 a year in property taxes.
The other tax advantage is that the assessed value can’t go up more than 3% a year.
The reason homesteading is called “Save Our Homes” is because by limiting how much your assesment can go up, it prevents people from losing their homes due to rising taxes.
But why am I paying higher property taxes than my neighbors…
You will end up paying more property taxes than your neighbors if your taxable value is higher than your neighbor’s taxable value.
Based on the above example my taxable value is $150,000.
If your sales price a year earlier was $210,000, and you homesteaded like I did, your taxable value would be approximately $160,000.
So your taxes would be a bit higher than mine because you paid more for your house, even though you moved in a year earlier.
And if you failed to homestead the house, or you couldn’t homestead the house (because it’s your second home or an investment property or a vacation property) then your taxable value will be closer to $210,000. And the taxes will be based on that higher number.
But I moved in WAY earlier than my neighbor and I am STILL paying higher taxes…
Here’s where it gets weird and a bit messy due to the housing bust.
Let’s use the same example again, where I bought the house for $200,000, except instead of buying it this year I bought it back in 2005.
Well, the market crashed.
Because the taxable value of my property can never be higher than its fair market value (due to homesteading law), the property appraiser dropped the fair market value of my property.*
According to their new assesment, the property appraiser says the fair market value of my home is now just $120,000. Taking off the $50,000 for homesteading, my new taxable value is now $70,000.
So I lost $80,000 in the value of my home, but at least my taxes dropped as well.
That may be the only silver lining in this whole thing.
Now, because my new neighbors bought their home as a foreclosure for $110,000 (and they are homesteading it), their taxable value will be only $60,000…which is $10,000 less than mine.
Even though they just moved in, because their sales price is less than the fair market value placed on my home by the property appraiser, they will pay less taxes than I will, and I’ve been in my house nearly seven years.
Can I appeal this fair market value?
Can you appeal your fair market value?
Yes you can, and if you have a legitimate case it might be a good idea because it will save you taxes down the road.
Even in this case, where the difference may only be $10,000 in valuation (worth about $150 in taxes), as the property begins to appreciate again those taxes will compound over time at a higher rate.
Another bummer from the housing bust: you lost your “portability” as well…
Portability. Passed in 2008 as “Amendment 1″ it was designed to let you take the tax savings from your old homesteaded home to a new homesteaded home.
For example, let’s say your homesteaded house had an assessed value of $200,000 but a “fair market value” of $300,000.
This “fair market value” (also called Total Market Value or Just Value) is assigned by your property appraiser. Fair market value is essentially the amount they would assess your property at if you didn’t have the homestead exemption.
So for homesteaded property: fair market value is what they could assess your home for if you didn’t have homestead, assessed value is the amount your home is assessed at and which can’t be raised more than 3% a year (this is also called the Save Our Homes value), and taxable value is the value they acutally tax you on after you take your homestead exemption (and any other exemptions) off your assessed value.
So you sell your house, and you buy a new house for $350,000, which you make your new homestead.
The difference between the “fair market value” ($300,000) and the “assessed value” ($200,000) of your old homestead is $100,000.
With portability you could take that $100,000 and it would become the new homestead exemption for your new house.
In other words your new $350,000 house will have an assessed value of $350,000, but then your $100,000 tax savings from your old home “ports” to your new homestead, reducing the taxable value to $250,000.
This $100,000 “port” is better than the $50,000 exemption you would have received without porting, and an additional savings in taxes.
But the market crash essentially wiped out most portability.
Since the housing market lost so much value in the bust and has gained only a little bit of it back…in other words, home appreciation is flat…if you look at property appraiser assesments it is a very rare occasion when you will find a fair market value that is higher than the assessed value (except in cases where the owner has lived in the home a very long time).
Thus, no portability.
The tradeoff is lower taxes now, instead of lower taxes in a home you buy down the road.
Heck, it was confusing just pulling this all together and I’m in the real estate business.
But, hey, things can only go up from here, right?
*As I understand it, the taxable value of your home can never exceed its fair market value or “just” value. However, there is nothing that compels the property appraiser to lower your fair market value. In some counties the property appraisers have not lowered the fair market value, or not lowered it enough since the market crashed. Resulting in higher taxes as millage rates went up. The fix? Amendment 4 goes in front of voters this November.
Image above by kind permission of 401 (K) 2012 under creative commons license at flickr.