Renting a Room Can Hurt Homestead Tax Exemptions

Some Fla. homeowners with homestead property-tax exemptions are finding that the exemption is at risk if they rent out part of the home or run a small business. SARASOTA, Fla. – When Dan Graue read a letter from the Sarasota County Property Appraiser that notified him he had been dodging taxes on his homesteaded property and now owed more than $64,000 in fines and back taxes, he thought there must have been an error. He and his wife, Jennifer, had owned the house off Bahia Vista Avenue since 1995, after purchasing the home from Jennifer’s family, which had owned the property since the 1950s. They quickly learned the property appraiser meant business. Florida’s homestead tax breaks are some of the most generous in the nation, shielding homeowners from hundreds, thousands or even far more annually in taxes, depending on the value of their primary residence. The exemption also carries the benefit of a cap on how much their taxable property value can rise each year, a coveted perk in an era of skyrocketing real estate prices. However, partially because of those advantages, the penalties for claiming the homestead exemption but not qualifying for it can be steep. A lawsuit over Sarasota County Property Appraiser Bill Furst’s handling of a similar homestead case was argued before the Florida Supreme Court late last year. The court’s ruling in that case could have far-reaching implications for homeowners who rent out portions of their property or who have home-based businesses and may face similarly steep bills for back taxes and penalties if they find themselves in local property appraisers’ sights – not to mention local governments’ tax coffers. At issue is the Graues’ decision to rent out a small garage apartment behind the property’s main house for years. The county property appraiser says as a result, they forfeited nearly half of their property’s homestead exemption and owe 10 years of back taxes, plus 15% interest and a whopping 50% penalty. They say their only option will be to turn the apartment into a short-term rental, since that would generate more revenue to pay off the debt sooner. “And nobody wants that,” Dan Graue said. After negotiations and an inspection, the property appraiser did come down from the nearly half of the homestead to about a quarter that no longer qualifies for the homestead exemption. Getting back the lost value of the homestead isn’t an option, and if the Graues don’t rent the property out now, the assessed value of the portion they rented will be calculated at today’s market value. Jennifer Graue said she feels like, in most cases if you break the law, you pay a fine or serve your jail time and the punishment is over. But for them, unintentionally breaking the homestead law will carry an indefinite sentence of higher tax bills. “In this case, we can’t say, ‘We’ll never rent it again’ and keep our homestead capped at where it should be,” she said. “It doesn’t make sense to me.” “The worst thing we could do now would be to reverse it, because (the assessed value of the property) goes to today’s value,” Dan Graue said. “There’s no choice.” Enforcing the law Furst said his office doesn’t make the laws, nor does it have discretion applying the penalties for breaking the law. “I feel sorry for the guy with the garage who gets caught and didn’t know,” Furst said. “But, you know, we don’t have the luxury of choosing which laws to enforce.” He said many of the homestead exemption violations he investigates begins after a neighbor alerts the office of a potential infraction. Brian Loughrey, chief deputy at the Property Appraiser’s Office, said the office has even changed procedures in an attempt to let people know when they may be breaking state law. The Property Appraiser’s website has an entire section dedicated to this issue and the office mails a postcard after the automatic renewal of a homestead every year that includes possible ways a homestead exemption can be lost, including the renting of any portion of the property. “We think the law is pretty clear,” Loughrey said. “It’s your homestead, up to the point that you use your homestead for commercial purposes. A business is not used for your homestead.” Furst also expressed some frustration with the penalty structure, but noted that portion of the law allows his office no discretion. “You can’t get 15% interest anywhere,” he said of the steep rate. Furst also disagrees that if he prevails in the case pending before the state Supreme Court – oral arguments took place in November – that it will result in more homeowners being penalized. Instead, he contends, if the court rules against him, homestead exemptions will be ripe for abuse from commercial property owners looking to minimize their tax liabilities. Furst was initially elected in 2008 and has shown a willingness to go the distance when legal challenges or issues arise regarding tax assessments and exemptions. He lost his last battle before the Supreme Court when a clerical error resulted in a significantly reduced tax assessment for a waterfront property and he sought to collect the full amount after the bill had already been paid. Furst had also challenged Marie Selby Botanical Gardens’ tax exempt status on the grounds that a business venture with Michael’s on East no longer qualified them for a full property tax exemption for a nonprofit. A magistrate in 2021 ruled that most of the land on the 15-acre bayfront campus would remain exempt, although, some of the property now does pay property taxes. Can a home-based business cost an exemption? The case now before the Supreme Court, Furst v. Rebholz, was filed in 2015 by Rod Rebholz. Rebholz, who has since died, lived on the first floor of a two-story house in Sarasota County, and rented four rooms on the second floor. Like the Graues, Rebholz was notified part of his homesteaded property did not qualify for the tax exemption because of the second-floor rentals. His attorney, Sherri Johnson of Johnson Legal of Florida P.L., argued the decision was unconstitutional, as the statutes governing homestead exemptions did not give the property appraiser the authority to split a homestead. Both the trial court and an appellate court agreed, ruling removal of a portion of a homestead was unconstitutional. But in arguments before the Supreme Court last fall, many of the justices posed questions indicating support for Furst’s case. Furst’s lawyers pointed to other parts of state homestead exemption laws that allow for the splitting of a homestead exemption, arguing that if he cannot split a homestead exemption even if a commercial business is being run out of the property, it will lead to abuse and higher taxes for taxpayers. But the justices also seemed uncomfortable allowing the property appraiser to decide what constitutes a commercial purpose. Justice Jorge Labarga noted that someone who bakes cookies for sale out of their home kitchen could be considered a commercial purpose and questioned what portion of the homestead would be given up in that instance. “The problem is where do you draw the line,” Labarga said. “The person who bakes cookies and sells them to stores out of their kitchen, does that become non-exempt property? That portion of the kitchen? Do we just do the oven? … I mean, where do you draw the line on these things?” Jason Lessinger, an attorney at Sarasota’s Icard Merrill representing the Property Appraiser’s office, acknowledged the complexity but insisted each case must be examined on an analysis of the facts. Lessinger cited an example of a person selling makeup from their home. If that person used a portion of the residence exclusively as a place of business, then it may not be eligible for a homestead exemption, particularly if they depreciated the space on their taxes. “Or better yet, I form a corporation and I lease those spaces to the business,” he said. “That’s no longer a homestead use.” Still, the majority of the questions dealt with outcomes of a ruling for Furst. Johnson did not concede that Rebholz ran a commercial business, though one of the tenants had been renting a room for 15 years. Effect on working from home? Last year, Rep. Fiona McFarland, R-Sarasota, filed a bill that would have provided property appraisers across the state some discretion on how they apply the 50% penalty and 15% interest in such cases. The bill would have also allowed a homesteaded residential property owner to rent out rooms or a garage apartment without losing the tax exemption. The bill never got out of committee. McFarland said that she believes state law needs to be changed, given rising rents and housing issues across the state. “We ought to do everything we can to free up available rooms,” she said. But given the bill’s fate last year, it’s unlikely she will file it again. She said the penalty issue could potentially be addressed by attaching language to other legislation. Johnson, the attorney in the Rebholz case, said she doesn’t believe a bill is needed, as she argues Florida law does not allow for splitting of a homesteaded, residential property. She also said if the Florida Supreme Court rules against Rebholz, it could prompt government property appraisers across the state to target people renting rooms on homesteaded properties. She also said that renting a room can be helpful for seniors on fixed incomes as Florida continues to battle rising rents. “As housing prices have gone up, sharing housing is one way to make ends meet,” she said. She also said the trend of people working from home since the pandemic is another area for worry if the Supreme Court overturns the lower courts’ rulings in the Rebholz case. “I think the Property Appraiser’s position could be very problematic for people who don’t work in traditional work environments,” she said. Dan Graue said he’s found the property appraiser’s office helpful, and that he’s learned a lot about property law in recent weeks. After he questioned the calculation that he should lose 45% of his homestead exemption given the size of the space rented, the property appraiser’s office inspected it and reduced homestead exclusion to about 29%, cutting the potential back taxes and fines by more than half. Graue said he would prefer to lose no more than 20% of the homestead exemption. “That takes it out of the heart attack zone,” he said.

Collier County Commissioners repeal 60-day rent increase ordinance

The Collier County ordinance that said landlords had to provide a 60-day notice to renters if they planned to increase the rent by 5% or more has been repealed. The board of commissioners voted Tuesday to repeal the ordinance less than a year after it was passed in October. The repeal passed 4-1. In December, the idea to repeal the ordinance was introduced. Advocates for the ordinance argued that the county had not given the measure enough time to work. In December, Collier County Commissioner Rick LoCastro said that the Fair Notice to Tenants Ordinance didn’t have teeth. “The question I asked every time is, so what has been the effect?” said LoCastro in a December meeting. With the ordinance repealed, landlords will no longer face a fine if they do not give a 60-day notice to renters when they intend to raise rents by 5% or more.

Homeowners: File Now for Homestead Exemption

Last year’s homebuyers can submit homestead exemption applications before March 1 – their once-per-year chance to apply for up to a $50K property tax reduction. ORLANDO, Fla. – New homeowners – and especially first-time homeowners – can lower their home’s estimated value for tax purposes by up to $50,000 if they apply for and receive a homestead exemption. However, they only have two months to do so through their county property appraiser, which can be found online. Applications must be in before March 1, 2023. The exemption rewards Floridians who live in the home. Of the $50,000 exemption, the first $25,000 applies to all property taxes, including school district taxes. The additional exemption up to $25,000 applies to the assessed value between $50,000 and $75,000 and only to non-school taxes. (See section 196.031, Florida Statutes.) If applying for the first time, they Florida Department of Revenue says new homeowners should be prepared to answer the following questions: Whose name or names were on the title on Jan. 1? What is your Social Security number and your spouse’s Social Security number? Were you or your dependent(s) living in the dwelling on Jan. 1? Do you claim residency in any other county or state? Property appraiser may ask for any of the following to prove residency: Proof of previous residency outside Florida and the date ended Florida driver license or identification card number Evidence of that a driver license from another state was given up Florida vehicle license plate number Florida voter registration number (if U.S. citizen) Declaration of domicile and residency date Name of current employer Address listed on last IRS return Dependent children’s school location(s) Bank statement and checking account mailing address Proof of payment of utilities at homestead address If moving from one Florida homestead to a new one, owners may be able to transfer – or “port” – all or part of their existing homestead assessment difference. Their county property appraiser will offer more information about the process.

Home Price Affordability Is Shifting – Where?

With affordability a current driver for both housing demand and supply, some analysts expect Midwest housing markets to draw buyers’ attention in 2023. CONYERS, Ga. – Single-family home and condo prices peaked in May. Buyers are looking for bargains after the boom. You’re undoubtedly well aware that housing prices have fallen in recent months, but did you know that condo prices are dropping less than single-family home prices? The median single-family home price crested at a record high of $452,518 in May and then slid 8.5% to $414,000 in October, according to a study from Point2 looking at the biggest 100 U.S. cities. The firm is a real estate price information service. The median condo price hit an all-time peak of $341,457 in May and then dipped 4.5% to $326,000 in October. So why the disparity in pace of decline? “When the pandemic forced everyone to cram their entire life inside their homes, spacious, single-family homes (preferably with a backyard) became a must,” the study said. “Consequently, homebuyers went into a real house-hunting frenzy, jump-starting a period of bitter bidding wars and rapidly escalating asking prices.” Bargain-hunting for condos But now buyers are searching for better bargains. “After demand for space drove house prices to historic highs, making them totally unattainable, homebuyers started shifting their attention toward the more affordable option – condos,” the study said. Single-family home prices decreased in 88 of the 100 largest U.S. cities from May to October, while condo prices descended in just 65. On the single-family home side, Irving, Tex. led the decline with a 22% drop, followed by Toledo, Ohio at 20% and Los Angeles and San Francisco at 18%. On the condo side, Stockton, Cal. paced the descent at 29%, followed by Raleigh, N.C. at 25%, New Orleans at 23% and Glendale, Ariz. and Omaha, Neb. At 21%. On the upside, Oklahoma City led condos with a 79% gain, followed by Tampa at 40%, San Antonio at 29% and Louisville and Nashville-Davidson at 14%. For single-family homes, Tulsa, Okla. was No. 1 with a rise of 11%, followed by Lubbock, Tex. at 4%, and Albuquerque and Miami at 3%. Shift to the Midwest Meanwhile, during the housing boom that raged from the beginning of the pandemic in early 2000 until May, the Sun Belt led the way. People were attracted to the warm weather, reasonable prices at the beginning of the boom and the lack of a state income tax in Texas and Florida. But next year, things are going to change, according to a commentary from Zillow, the real estate information service. “As affordability has become the key driver of both supply and demand in the market, places that still feature reasonable prices are already seeing momentum shift their way, and should have the healthiest housing markets in 2023,” Zillow said. That means the Midwest. “Unlike nearly every other region in the U.S., prices in most Midwest metro areas haven’t run up to extremes,” the firm said. “Mortgage costs as a share of income are still within healthy, sub-30% levels across Ohio, Pennsylvania, Kansas, upstate New York, Iowa and smaller metros, in Illinois, which will allow first-time buyers to take the plunge.”