How to Lose Homestead Tax Breaks

Homestead property gets a lot of tax breaks in Florida. First $25,000 of assessed value is exempt from property tax. The third $25,000 of assessed value is exempt from all but the school portion of property tax. There are widow/widower, senior citizen and disability exemptions for homestead. And there is a cap on increase in assessed value for tax purposes of the lesser of three percent or increase in the cost of living.

Florida’s tax treatment of homestead property makes homesteading a very attractive option. Homestead is so attractive that some attempt to double or even triple the benefit by action that is not consistent with Florida’s homestead laws. Those efforts can result in substantial fines and even criminal prosecution. 

What is homestead? Article X, Section 4 of Florida’s Constitution defines homestead that is exempt from forced sale by the owner’s creditors as being property and improvements not exceeding 160 acres outside of a city and not exceeding one-half acre within a city. But the definition does not explain what is homestead…. only that homestead gets protection from creditor claims. Court cases have adopted the historic definition of homestead as meaning one’s primary and permanent residence.

Some want the benefit of homestead tax treatment but also benefit of renting their home for part or all of the year. How does that work out for them?

Section 196.061 Florida Statutes provides that rental of all or substantially all of a property claimed as homestead constitutes abandonment of the property as a homestead for tax purposes until the dwelling is physically occupied by the owner. However, such abandonment after January 1 of any year does not affect the homestead tax exemption for that year unless the property is rented for more than 30 days per calendar year for two consecutive years. The statute is intended to allow the extremely short-term rental of a homestead for special events like the Daytona 500 stock car races.

Abandonment is not good if one wants continued tax benefits. Losing the tax benefit by renting can be all or nothing unless only part of the homestead is rented. When only a part of the homestead is rented, the property appraiser allocates the percentage remaining and applies the homestead tax benefit to the non-rented portion. Some Florida courts had opined that homestead was all or nothing and indivisible; when part was rented the entire property remained homestead. Florida’s Supreme Court corrected those judges in the recent case of Furts v. Rebholz. 

In the Furts case, the court explained that when part of property that has qualified as homestead is rented, homestead tax benefit applies to the part not rented only and the property appraiser for that County is to reasonably apportion the property between homestead and non-homestead.

While abandonment of homestead is usually bad for property taxes, it can be a good thing when property is damaged. If damaged by casualty, homestead is not lost even though the owner has to move to another home as long as reconstruction starts within three years from January 1 of the year of loss and does not increase the original square footage more than 110 percent. Everything over 110 percent is reassessed. Owner of a home significantly damaged or destroyed by a named tropical storm or hurricane can also elect to be deemed to have abandoned the damaged homestead so that a new home can qualify for homestead if the new homestead is qualified by January 1 of the third year following the storm. That means the tax savings from reduced assessment of the old homestead can be transferred to the new homestead. 

Rental is one way to try and game the tax system. Another is claiming more than one homestead. Florida’s Constitution addresses homestead and provides: “Not more than one exemption shall be allowed any individual or family unit…” The Florida Department of Revenue recognizes that not all married people live together or constitute a “family unit.” The Department’s rules allow each spouse to be granted a homestead exemption for separate property if the property appraiser for the county determines separate residences and separate family units have been established by the husband and wife.

Some married couples try to establish two homesteads by placing a Florida home in one and an out-of-state home in name of the other. Each then applies for homestead and sometimes they are both successful. But, unless they are truly living apart, the success can be short-lived.

In Wells v. Haldeos, the court agreed each spouse could get a homestead exemption when they had been separated, had no contact with each other and no financial connections because that arrangement was not a “family unit.” But, when a marriage is intact, success is unlikely.

In the case of In re Middleton, the bankruptcy court denied claim to Florida homestead by the husband when the husband lived with his wife at their home in Georgia. In Endsley v. Broward County, the court upheld the property appraiser removing the wife’s homestead exemption because her husband had an Indiana homestead exemption which benefited the wife because they intermingled funds. The couple was limited to one homestead because they were not separated and often spent time together in the same home.

When the property appraiser decides to revoke homestead, the revocation usually goes back. The property is reassessed for as far back as 10 years, an under-reporting penalty applied of 50 percent plus interest at 15 percent a year. The person fraudulently claiming homestead may also be subject to prosecution as knowingly and willfully giving false information to obtain homestead exemption is a first-degree misdemeanor punishable by up to one year in jail and a maximum fine of $5,000.

Common sense tells us a person can really only have one primary and permanent residence and that the same holds true for a couple in an intact marriage. Nevertheless, some couples try to double their benefits by pretending each lives in a different home. That pretense can be expensive if it is proven false by the property appraiser.