Every week, Mansion Global poses a tax question to real estate tax attorneys. Here is this week’s question.
Q: How does homesteading your property in the U.S. impact property taxes?
A: The word "homestead" may conjure up an image of an off-the-grid compound on the range. Legally, however, it just means where a person lives.
"It can be a house, a condo, a co-op, anything," said Leslie Evans of Leslie Robert Evans & Associates in Palm Beach, Florida. "It just can’t be owned by an LLC; it has to be owned by an individual or trust."
Most U.S. states have homestead exemptions or credits. These can lower a taxpayer’s property taxes, as well as limit how much taxes can be raised each year and potentially limit taxes to a certain base year, often the year the property was purchased, according to Joshua E. Estes, co-founder of the Dallas-based law firm Estes & Gandhi.
To qualify for the exemption, generally the home must be a primary residence, the lawyers said. And for owners to qualify, they often need to have been a resident of the property from Jan. 1 on, so those who bought in June have to wait until the next year to file for the exemption.
More:Do Military Veterans Get Property Tax Breaks in the U.S.?
In Texas, high property taxes can be offset by the homestead exemption, Mr. Estes said, but the exemption is given county by county and the relief "varies wildly." Some areas, like Dallas, give a 20% exemption, meaning the assessed value of the home is reduced by 20% for tax purposes.
"If you have a $100,000 house, that means $20,000 off," Mr. Estes explained. "If it’s worth $20 million, you chop off $2 million."
Other areas do a flat $20,000 off the value. It’s important to check each appraisal district to determine how they handle the exemption, he said. For disabled homeowners and those over 65, additional benefits are available, he said.
In Florida, specifically, the homestead exemption does three major things for taxpayers, Mr. Evans explained.
From Penta:Planning Ahead for Longer Lifespans
"The first thing is that it reduces the assessed value of the house by $50,000 for tax purposes," he said.
It also caps annual increases to assessed value of the property to the "lesser of 3% or the CPI" (Consumer Price Index). That can lead to substantial savings, especially since the market value can be far greater than the assessed value.
"I have clients with homes worth $25 million to $30 million who are paying taxes on $11 million or $12 million," Mr. Evans said.
And although it’s required that a person must be a Florida resident to get the exemption, there’s no set number of days he or she needs to be in the state, Mr. Evans said. So a person could be considered a Florida resident and get a tax exemption on a home there without being in the state for even a majority of the year.
More:Click to Read Tax Experts Share Answers and Advice for Readers’ Pressing Tax Questions
It should be noted that there’s a difference between getting a homestead exemption on property taxes and a homestead that’s established for other legal purposes. In the latter case, a homesteaded homeowner could have protection against creditors in times of financial hardship.
For instance, a homesteaded owner in the Sunshine State is protected in the case of bankruptcy, as the home can not be repossessed, Mr. Evans said.
In California, a declaration of homestead doesn't lower property taxes, but it does protect the equity of a home for owners. The state has a homeowner's exemption, which is capped at $7,000, confirmed C. Stephen Davis of the law firm Greenberg Traurig in Irvine, California.
Email your questions to editors@mansionglobal.com. Check for answers weekly at www.mansionglobal.com.