Florida’s Property Tax Reform

Stephen D. Dunegan and Erik N. Bonnett

On Tuesday, January 29, Floridians will vote on Amendment 1, the Florida Legislature’s response to the dramatic increases in property taxes that occurred when home values shot up in the last decade. If passed by the required 60% vote, the proposed amendment to the Florida Constitution would provide at least some tax relief for all homeowners and a potentially large tax break for others. There are four key components to the proposed amendment, which are discussed below.

Portability of Save Our Homes Benefit. The most significant element of the proposed amendment is the portability of a homeowner’s built up Save Our Homes (SOH) benefit, up to a maximum of $500,000. Portability is applicable to all levies, including school district levies. Portability will benefit long-time homeowners who build up a large benefit due to the SOH assessment cap and wish to relocate within Florida.

Under current law, homeowners who sell their home and then purchase a new residence lose their accumulated SOH benefit, and the new home is assessed at full value. Under the proposal, they would be able to transfer all or a portion of their SOH benefit to the new home. To put this portability in perspective, transferring $500,000 of SOH benefit to a new residence in Orange County would equate to approximately $8,500 in annual property tax savings.

In order to take advantage of portability, a homeowner must purchase a new homestead within 2 years of selling the previous residence. Homeowners who sold their homes in 2007 will qualify for portability if they establish a new homestead by January 1, 2009.

Portability is applied differently depending upon whether a more or less expensive replacement home is purchased. If the new home is less expensive, the homeowner can transfer a SOH benefit that protects the same percentage of the new home’s value as it did the former home, subject to the $500,000 maximum benefit. For example, assume a homestead is assessed at $250,000 for property tax purposes while the actual fair market value of the home is $500,000. The difference between the assessed value and the actual value of the home is due to the fact that the value of the home increased at a faster rate than the SOH assessment cap. The difference between the assessed value and the actual value is what we refer to in this article as the SOH benefit. Assuming the homeowner sells her home and moves into a new homestead worth $400,000 within the required 2 year period, she will be able to transfer $200,000 of her SOH benefit to the new homestead, causing the new homestead to be assessed at $200,000. Thus, the new homestead will be assessed at the same percentage of fair market value as the previous homestead.

If a more expensive home is purchased, the entire SOH benefit can be transferred, up to a maximum of $500,000. For example, assuming the same facts as in the above example except that the homeowner moves into a new homestead worth $600,000. Under this scenario, she will be able to transfer all $250,000 of SOH benefit to the new homestead. The new homestead will be assessed at $350,000.

Eventually, portability would provide a benefit to everyone who owns a homestead in Florida for an extended period of time, because the built up SOH exemption will follow the homeowner as long as he/she stays in Florida. For the near future, the portability will only provide a benefit to people who already have a large built up SOH exemption or to individuals who had one before and changed residences in 2007.

Under the proposed portability system, first time Florida home buyers will not receive an immediate property tax benefit. These individuals would pay higher property taxes than a longtime Florida homeowner who moves into the same neighborhood even though their houses could have an identical market value. This disparity could be so great that some critics have questioned whether this amendment to the Florida Constitution would violate the commerce clause of the U.S. Constitution because it would effectively discriminate against out-of-staters moving into Florida.

Increases homestead exemption from $25,000 to $50,000. The amendment creates an additional $25,000 homestead exemption applicable to values over $50,000. However, this increased exemption will not apply to school district levies. Since school district levies make up about 40% of property taxes, the $25,000 increase in homestead exemption will be more like a $15,000 increase. According to the Orlando Sentinel, this increased homestead exemption will provide an average yearly property tax reduction of approximately $240. This increased exemption will provide an immediate benefit to all homestead owners.

$25,000 tangible personal property tax exemption for businesses. Of the approximately 1,300,000 businesses which are now required to pay a tangible personal property tax, over 1,000,000 would be totally exempt from filing and paying this tax if the amendment is passed. Thus, the new tangible personal property tax exemption would provide relief to a large number of small business owners in the state.

10% cap on assessments for non-homestead property. The final component of the proposed amendment is a 10% cap on annual increases in assessments for non-homestead property. This cap will apply to business property as well as second homes and rental property. The 10% cap will not apply to school district levies. The 10% cap appears to be a modest benefit January 24, 2008 Page 3

because it is only useful if the value of the property increases by more than 10% in a given year. Moreover, it will expire in 10 years. Given the current real estate market, a double digit percentage increase in real estate prices seems unlikely anytime soon.

Impact of Amendment 1: As has been spelled out clearly in the media and in various public awareness campaigns recently, Amendment 1 would have a dramatic impact on city and county budgets. It has been estimated that it would impact the tax revenues of local governments by $9.3 billion over the next 5 years, including $1.5 billion for school districts. However, Governor Crist, an ardent proponent of Amendment 1, has pledged that Amendment 1 would not result in any public safety layoffs and has proposed funding increases for public schools.

As noted above, some commentators have called into question the Constitutionality of Amendment 1. If the increased benefit that it provides to long-time Florida residents vis-à-vis first-time homebuyers (most of whom might be expected to be from out of state), is deemed an unconstitutional burden on interstate commerce, some fear that it could cause the entire SOH benefit to be declared unconstitutional. Such a ruling could wipe out the tax savings everyone with a SOH benefit currently enjoys, and create a complicated and expensive property tax nightmare for the state. How the courts would rule on this matter is uncertain, therefore this worst case scenario is merely speculation at this point.

In light of the fact that Amendment 1 is on the primary ballot, which historically has a low voter turnout (and which may be lower than normal given the unseating of Florida’s delegates by the Democratic Party and the Republican Party), the likelihood of Amendment 1 receiving the required 60% vote for passage seems doubtful. But if an amendment to protect pregnant pigs can pass, anything is possible.

The authors of this article are Stephen D. Dunegan and Erik N. Bonnett, both members of Dean Mead’s Estate and Succession Planning Department. Steve and Erik would be happy to answer any questions you have about Amendment 1 or any other homestead, tax or estate planning issues. Steve can be reached at (407) 428-5141 and Erik at (407) 428-5176.