Does Homestead Tax Exemption Make Sense?

After the passage of the homestead tax ceiling rule, Miami Beach homeowners thought they were going to get some tax relief. But not everyone is convinced, as evidenced by a discussion on the area’s online City Debate forum. Prior to the new rule, the County tax assessor re-valued properties in an area annually, and would increase the values — which, in turn, increased the property taxes. Owners paid roughly the same on the same street.

The new rule now limits the increase in Florida property taxes to 3 percent, curbing the jump from one year to another. To be protected by this rule the homeowner must have a homestead exemption — in other words, they must live in the property. With homes increasing 20-25 percent from one year to the next in the booming South Florida housing market, this sure sounds good for those not selling. Owners can refinance or get lines of credit, take out funds exceeding their Florida home loans and not suffer any tax increases.

For example, a homeowner could have purchased a home assessed seven years ago for $100,000, with a local tax bill of $1,500 a year. Even with the property reaching upwards of $400,000 in value (not uncommon for Miami real estate these days), the individual’s tax bill would still be around $2,000. Because the county assesses $2 per $1,000 of value, this home should be now paying about $9,000 or more in taxes, but the 3 percent rule forbids it.

The roughly $7,000 in savings looks great on the surface, but is it fair that a pair of homes a yard apart should be paying outrageously different tax rates? If the home is sold and acquired by another person, the full tax burden – $9,000 a year — will be levied. Meanwhile, the guy next door is paying $2,000. Does this unfairly shift the burden to the new homebuyer? If the 3 percent rule were not in effect, new owners would not have to pay the unfair burden.

The result? Older homeowners will be less inclined not move. They might get a windfall profit for their home, but when they buy another property, it will be engulfed. The new owner will not pay the old tax, but the new, “market-priced” tax. Not exactly the housewarming gift you would hope for.

Where this hurts most is with seniors. Many want to downsize due to limited retirement income, but their profits are eaten up quickly and the problem is compounded by a property tax of 3-5 times the amount they were accustomed to. Also, seniors who own and live in duplexes or triplexes are only partly covered by the 3 percent limit. In a duplex, only half the property is owner occupied, so the remaining unit will rise with annual appraisals. With rents not keeping up with value increases, the owner finds it harder to pay ownership costs, and may be forced to take out a reverse mortgage just to get by.

Many older owners then want to sell. Seeing the incredible appreciation and taxes, the next step is for a buyer to convert the building to condominium. This is happening on Miami Beach and in Arizona and plenty of other places. In the late 1990s, you could buy a $200,000 4-plex and rent out units for $500 a month, with three units paying off debt and the fourth generating profit. Today, the same buildings are selling from $600,000 to $900,000, yet rents have gone up only modestly.

Therefore, a buyer who pays $700,000 is inclined to convert the property to a condominium, sell the units at $200,000 or $250,000 per, and bank six figures in quick profit. As a result, finding an affordable rental on Miami Beach will be next to impossible.

It’s scary, and here is another interesting thought. Suppose four new owners buy and live in the newly-converted condominium building. Each files for the homestead exemption, putting even more of a burden on the established Miami real estate owners. Apartment owners cannot demand rents of $1,500 - $2,000 to cover the cost when someone could buy and own the same type unit for almost the same monthly amount?

In Miami Beach, the 24 percent overall property value increase has not resulted in a lower mill rate. Many feel that the 3 percent rule is not working and, unless there is some serious attention paid to the area’s budget, many foreclosures will follow in the coming years. New condominium development is expected to slow this year and those looking to flip are going to suffer as the rates of Florida home loans increase. It is a situation that many South Florida communities are going to have to focus on if they do not want to alienate the middle class.