Category Archives: Property Taxes

PortABILITY: The 4th Real Estate-Related Term of 2008

“Take what you can. Take what you can!”, I heard someone shout softly at my voting precinct, Iglesia Bautista de Renovacion (Baptist Church of Renovation for you English-speaking heathens), last Tuesday.

I guess.

By now, Amendment One is so last week’s news. Britney was released from UCLA Medical Center while “in the throes of a mental health crisis”, the Eli Manning-led NY Giants won the Super Bowl, Andy Petitte talked to the House (he tried HGH only twice – no for real, he was recovering from an injury) and Kazaam was handed a one-way ticket to the desert.

In the meantime, A Miami Real Estate Blog was busy at work adding a 4th real estate-related term to the 2008 list.

A MIAMI REAL ESTATE BLOG: Ladies and gentlemen, it is with great pleasure that I introduce to you

[Drumroll.]

A MIAMI REAL ESTATE BLOG: Portability!

[The crowd rises to its feet.]

PORTABILITY: Thank you, thank you…thanks…too kind. Please, please…have a seat. [Pause.] I want to, first and foremost, thank YOU all for your support. Thanks for showing up in droves and making all of this possible.

[Deafening applause.]

PORTABILITY [after a short pause.]: I’d like to specially thank Governor Crist for indoctrinating his tireless efforts. Without him, there is no me.

CROWD [in unison]: Charlie, Charlie, Charlie, Charlie…

[GOVERNOR CRIST, tickled pink and seated to PORTABILITY’S right, stands and acknowledges the crowd.]

GOVERNOR CRIST [in a soft whisper meant to be lip read, not heard]: Thank you. Thank you.

PORTABILITY: Due to the exhaustion caused from the overwhelming support, I will not be answering any questions today. I have chosen a publicist, A MIAMI REAL ESTATE BLOG, to do the talking for me.

A MIAMI REAL ESTATE BLOG: Portability has been with us for about 9 days now. My apologies for not introducing him sooner. I felt that we needed to get to know each other a little bit better before I introduced him to the masses. As he mentioned seconds ago, he’s a little weary from the traveling and endless campaigning, so I’ll be doing most of the talking for him.

If you received a Homestead Exemption in 2007 on a Florida home that you sold or abandoned during 2007 and purchased a new home in Florida that served as your primary residence as of January 1, 2008, you are eligible to take some or all of the benefit (up to $500,000) of Save Our Homes (Amendment 10) to your new home. The Save Our Homes benefit is the difference between the Market Value and the Assessed Value of your (previous) homestead property.

Portablity Example

Let’s say that Danny Adejo owned a homestead property in an unincorporated area of Miami-Dade County in 2007 in which the following scenario applied:

2007 Market Value: $331,281
2007 Assessed Value: $178,848
– Homestead Exemption: $25,000
2007 Taxable Value: $153,848

2007 Millage Rate: $18.5679
2007 Property Tax Amount: $2,856.63

Save Our Homes Benefit: $152,433

(Please keep in mind that in order to simplify things, I am not including non-ad valorem assessements like garbage/trash removal, recycling, fire fees, etc. in the examples.)

Mr. Adejo purchased a new property in unincorporated Miami-Dade County in June 2007. The sale price of the new home was $385,900. Since Mr. Adejo occupied the home as his primary residence as of the assessment date (January 1, 2008), he qualifies for a Homestead Exemption. As a result of Amendment One’s enactment, he also qualifies for portability in 2008. His new scenario (assuming that the Miami-Dade Property Appraiser will assess the property at the same amount as the purchase price) is as follows:

2008 Market Value: $385,900
2008 Assessed Value: $385,900 – $152,433 (Save Our Homes Benefit) = $233,467
– Homestead Exemption: $25,000
– 2nd Homestead Exemption: $25,000
2008 Taxable Value (non-school district): $183,467
2008 Taxable Value (school district): $208,467

2008 Total Millage: $18.5679
2008 School Millage: $7.6078
2008 Non-school Millage: $10.9601

2008 Property Tax Amount: $2,010.82 + $1,585.98 = $3,596.80

(The 2007 millage rate was used for the 2008 example.)

Let’s take a look at Mr. Adejo’s scenario had Amendment One not passed last week:

2008 Market Value: $385,900
2008 Assessed Value: $385,900
– Homestead Exemption: $25,000
2008 Taxable Value: $360,900

2008 Millage Rate: $18.5679

2008 Property Tax Amount: $6,701.16

Wow! As a result of Amendment One’s portability opportunity, Mr. Adejo will save $3,104.36 in property taxes in 2008 in his new home.

Hold on. Before you pop the Veuve Cliquot in celebration,

veuve.jpg

let’s take the scenario one step further. Mr. Adejo did not sell his former homestead property in 2007. Instead, he decided to keep it as a non-homestead investment property.

Assuming that the Miami-Dade Property Appraiser’s Office makes no change to the market value of Mr. Adejo’s non-homestead property for the 2008 tax roll and that the 2008 millage rate remains the same as 2007’s, the scenario will look as follows:

2008 Market Value: $331,281
2008 Assessed Value: $331,281
2008 Taxable Value: $331,281

2008 Millage Rate: $18.5679

2008 Property Tax Amount: $6,151.19

Ouch! That’s a 215% increase in property taxes for the non-homestead property. Instead of saving $3,104.36 in property taxes in 2008, Mr Adejo is actually in the red $190.20:

$3,104.36 (taxes saved from portability in new homestead property)
– $3,294.56 (increase in taxes in non-homestead property)

Why did Mr. Adejo’s property taxes rise by astronomical proportions at his non-homestead property in 2008?

Well, for starters, Amendment One just didn’t go far enough in addressing property taxes for non-homestead second homes, investment properties, commercial properties, vacant land, etc. You can see that the tax burden in the preceding scenario (which, by the way, is a real one) was just shifted from one property to the other.

Yes, had Amendment One not passed, Mr. Adejo would be facing two stiff property tax bills instead of one.

Interlude: I don’t know about you, but $3,596.80 in property taxes doesn’t exactly sound like a bargain to me – portability or no portability.

That’s not the point, however. Mr. Adejo decided to keep his former homestead as an investment property and provide quality housing to a qualified tenant. The chances of Mr. Adejo breaking even, let alone having a positive cash flow in the non-homestead property due to the large property tax increase, is slim to none. The rising costs of property taxes, as well as property insurance, have literally washed away the rental economics of owning residential investment property in South Florida.

Mr. Adejo is forced to make a decision sooner rather than later. Continue to hold on to the property despite a negative cash flow in a “declining market” (it’s official) or attempt to sell the property in an already crowded real estate market.

Transferring Save Our Homes Benefit to Your New Home

If you qualify for portability in 2008, you must apply for a Homestead Exemption with the Property Appraiser’s Office by March 3, 2008. In addition, you must also submit a Portability Application Form (DR-501T) to the Property Appraiser’s Office by March 3, 2008.

If you have already applied for a Homestead Exemption on your new home, you must still complete the Portability Application Form by March 3, 2008 in order to benefit from portability.

Someone looking to transfer his/her Save Our Homes benefit from a previous homestead located in a different county, needs to fill out a Certificate for Transfer of Homestead Assessment Difference (DR-501R) with the Property Appraiser’s Office in the county in which the new homestead is located.

Additional $25,000 Homestead Exemption

All persons currently receiving a Homestead Exemption and who continue to live in the same (primary) residence will automatically qualify to receive the additional Homestead Exemption. You need not apply for the new Homestead Exemption.

10% Assessment Limitation on Non-homestead Property

2008 will serve as the base year (first year) for the 10% limitation on the assessed value of a non-homestead property. Owners of property subject to the 10% assessment limitation will need to apply with the Property Appraiser’s Office on or before March 1 of each year beginning in 2009. As it currently stands, the 10% limitation will not renew itself like the Homestead Exemption. You must apply each year in order to qualify. Applications are not yet available for the 10% limitation.

For more detailed information on Amendment One, visit the Florida Department of Revenue’s website.

If you prefer to speak to a human voice (I think), feel free to call me at 305.491.7179.

Adrian Salgado is a Realtor Associate with RED I Realty in Miami, FL and can be reached at 305.491.7179 or SalgadoA@gmail.com.

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Filed under Portability, Property Taxes, Real Estate Terms

Amendment One: Property Tax Reform or Tax Cut?

vote.jpg

Before I get into the gist of Amendment One, the proposed property tax amendment to the Florida Constitution that will go on the ballot for voters to decide this coming Tuesday, January 29, 2008, I would like to encourage all U.S citizens to exercise your fundamental right to vote – the simplest form of government participation. It won’t even get in the way of (un)American Idol and SportsCenter. I promise.

While no one will debate the fact that Florida’s property tax system needs serious reform, how to go about reforming the system remains a hotly contested issue throughout the state.

The following is what’s proposed by Amendment One:

  • doubles the Homestead Exemption from $25,000 to $50,000. The new exemption does not apply to school taxes (about 40% of property taxes). It applies fully to homesteads valued at more than $75,000 and partially for homesteads valued over $50,000.
  • provides a 10% cap on assessments for non-homestead property; not applicable to school taxes.
  • allows current homeowners to transfer up to $500,000 in Save Our Homes (Amendment 10) tax benefits from their current homestead to a newly purchased home. Applies to homes purchased in or after 2007.
  • creates a new $25,000 exemption for business property, including office furniture, computers, machinery and equipment.

At first look, voting yes on Amendment One sounds like a no brainer. Who doesn’t want lower property taxes and the freedom to move without being “unfairly taxed” (portability)?

Analyzed closely, however, Amendment One me huele a tumbe. It’s more politics than actual tax reform.

Allow me to analyze the facts. Let’s look at the three items on the amendment that affect current and prospective property owners. After all, we do make decisions based on facts. Es o no es?

DOUBLING THE HOMESTEAD EXEMPTION (HEX)

For those not in the know, Homestead Exemption is commonly referred to as HEX by the staff at the Miami-Dade Property Appraiser’s Office. It’s sexy like that. On second thought, it rhymes with _ex. It doesn’t get any sexier than that.

This one’s pretty straight forward. Or is it? The current $25,000 Homestead Exemption would be “doubled”. Homeowners would get to deduct an additional $25,000 from the assessed value of their primary residence if it is valued at $75,000 or more. However, the second Homestead Exemption does not apply to school district taxes.

The current $25,000 Homestead Exemption saves Florida property tax payers an estimated $500 in annual property tax the first year it is granted to a homeowner (it saves a lot more as the cap afforded by Save Our Homes increases the longer one stays put). The additional $25,000 Homestead Exemption proposed under Amendment One would save the average Florida tax payer an average of $240 more in annual property tax.

TEN PERCENT (10%) CAP ON NON-HOMESTEAD PROPERTY ASSESSMENTS

Under Amendment One, assessments of non-homestead properties (warehouses, retail locations, offices, raw land, multi-family apartments, second homes, vacation homes, etc.) would be capped at 10% a year. However, because school tax districts are not covered under the cap, the 10% cap would only apply to approximately 60% of the average tax bill.

As it currently stands, non-homestead properties don’t qualify for a HEX (and consequently don’t benefit from a cap on the assessed value). Therefore, market value and assessed value are always the same. As a result, the property’s market value is always equal to the property’s taxable value.

The following example, using the City of Miami millage rate for 2007 and assuming that it would remain steady for subsequent years, should help you understand this portion of the amendment better:

2007 Market Value (MV): $200,000
2007 Assessed Value (AV): $200,000
2007 Total Millage (TM): 0.0221551

2007 Tax Amount: $200,000 (AV) x 0.0221551 (TM) = $4,431.02

2008 Market Value: $240,000 (20% increase)
2008 Assessed Value: $220,000 (10% CAP)
2008 Total Millage: 0.0221551

$220,000 (AV) x .0142071 (Total Millage – School Millage) = $3,125.56
$240,000 (MV) x .007948 (School Millage) = $1,907.52

2008 Tax Amount: $3,125.56 + $1,907.52 = $5,033.08 (13.6% increase)

Had school tax districts applied, the total tax bill would have been:

$220,000 (AV) x .0221551 (TM) = $4,874.12 (10% increase)

Politicians and other advocates of Amendment One have made assertions that non-homestead properties’ taxes cannot go up by more than 10% annually. The example above proves this statement to be incorrect.

PORTABILITY

The portability provision is THE selling point of Amendment One.

Amendment One would allow homeowners to transfer a tax shelter of up to $500,000 of capped value accumulated under Save Our Homes to a different property.

Example:

Assume that you bought your home in 1994, the year that Save Our Homes took effect. In 1995, the first year you qualified for a Homestead Exemption (base year), the property’s market value was $100,000.

Let’s assume that the millage rate from 1995 – 2007 remained steady at .023 throughout those years (it usually goes down a little bit due to an increased tax base), that the market value increased at an annual rate of 5% from 1995 – 2003; 20% from 2004-2006; and remained stable in 2007, and that the assessed value was capped at exactly 3% each year.

As it currently stands, Save Our Homes caps the assessed value of a property with a Homestead Exemption at 3% or the Consumer Price Index (CPI aka inflation), whichever is lower. For purposes of this example, I used a flat 3% rate. However, there were years between 1995 & 2007 in which CPI was lower than 3%.

Using the example above, not only would you have saved $10,155.29 in property taxes from 1995 – 2007 as a result of having a Homestead Exemption, you would have also created a cap of $112,728.00 that Amendment One would allow you to transfer to a new, more expensive property.

Email me if you’d like to see the spreadsheet detailing what I describe above.

Let’s assume that you live in an unsightly cookie-cutter community and your neighbor, Mr. MeToo, has the same exact house as yours. However, Mr. MeToo bought during the housing boom in 2005 and paid $230,000 for his home. Now assume that the market value and assessed value of his home in 2006, the first year that he qualified for a HEX, was $230,000. If you subtract the $25,000 HEX from his assessed value, your neighbor’s house has a taxable value of $205,000. With a millage rate of .023, Mr. MeToo paid $4,715 in property taxes in 2006 for the same exact house as yours. You? $2,688.26.

Meanwhile, in late 2007 you decided that you no longer wanted to live next to Mr. MeToo and decided to buy a bigger property in a different community with large cookie-cutter homes. You paid $300,000 for the 2,200 SF 4/3 with a 2-car garage and an olympic size pool fronting an L-shaped lake that the developer, SeCaen Homes, man-made.

The first year that you qualify for the double HEX, 2008, the market value of your new castle is:

2008 Market Value (MV): $300,000
2008 Assessed Value (AV): $187,272 ($300,000 – $112,728 CAP from former home)
– $25,000 Homestead Ex: $25,000
– $25,000 Homestead Ex: $25,000

Taxable Value (non-school) = $137,272
Taxable Value (school district) = $162,272

2008 Total Millage: 0.0221551
2008 Non-school Millage: 0.0142071
2008 School Millage (SM): .007948

$137,272 x .0142071 = $1,950.24
$162,272 x .007948 = $1,289.74

2008 Tax Amount = $3,239.98

Your new neighbor, la Señora Yo(landa) Tambien, has the same exact house as yours with the same 2-car garage, the same olympic size pool, fronting the same exact L-shaped lake. She also paid $300,000 for her new crib. However, Yo(landa) Tambien, is a first time home buyer in Florida. Let’s take a look at how her situation differs:

2008 Market Value (MV): $300,000
2008 Assessed Value (AV): $300,000
– $25,000 Homestead Ex: $25,000
– $25,000 Homestead Ex: $25,000

Taxable Value (non-school) = $250,000
Taxable Value (school district) = $275,000

2008 Total Millage: 0.0221551
2008 Non-school Millage: 0.0142071
2008 School Millage (SM): .007948

$250,000 x .0142071 = $3,551.78
$275,000 x .007948 = $2,185.70

2008 Tax Amount = $5,737.48

Let’s look at the snowbird who purchased yet the same house at the same price and see how his situation differs:

2008 Market Value (MV): $300,000
2008 Assessed Value (AV): $300,000

Taxable Value (non-school) = $300,000
Taxable Value (school district) = $300,000

2008 Total Millage: 0.0221551

$300,000 x .0221551 = $6,645.30

2008 Tax Amount = $6,645.30

Sidebar: No one has even mentioned how inequities in market values will affect the portability cap. I’ve seen units in condominium buildings that are mirror images located side by side with two totally different market values.

Those with a HEX don’t tend to complain or even notice the inequities because the HEX caps their assessed value and as a result, their property taxes, anyways. However, if Amendment One is passed, the market value of a property (even when it has a HEX) becomes much more important due to the fact that it determines the cap that you will be able to “walk away” with if you decide to move.

CONCLUSION

While it’s hard to reject something that cuts taxes (no matter how small the cut), the long term effect that Amendment One will have on the local economy and our quality of life, far offsets any gains it will produce. This isn’t tax reform. It’s simply a tax cut directed at appeasing a powerful group of voters – current homeowners.

The additional $25,000 Homestead Exemption minus the school taxing district is like a bad Carrot Top joke. All this talk about property tax reform and the only thing someone like me (who has no plans to move in the near future) gets is an average of $240 in annual tax savings? That’s not even enough to buy a bottle of Grey Goose to impress my friends y la rubia that’s jocking my stainless steel Casio at a local nightclub!

The 10% cap on non-homestead properties, while a step in the right direction, is not nearly enough to provide much needed relief to those who own investment properties and second homes in Florida.

According to Florda TaxWatch, net migration into Florida has slowed considerably in the past few years. The high cost associated with owning property in Florida (property taxes and insurance) are likely to be a big cause of that. Snowbirds and other part-time residents, a segment of homeowners in Florida that we ALL depend on, are a great deal for Florida full-time residents. Part-time residents pay full-time taxes, but use only a fraction of the services that a full-time resident does.

While the current portability provision may stimulate the housing market at first, I think it’s overall effect on the local housing market is being overstated by proponents of the amendment. I think most people who stand to benefit from portability won’t take advantage of it. This is just my personal hunch. I have no empirical data to support this statement, but neither do proponents who confidently state that portability will resurrect the critical real estate market.

Time will tell if people will move out of their homes and purchase new ones as a result of portability. I’m willing to bet that a large percentage will not.

Besides, most move-up buyers and even those looking to downsize need to sell their current homes before they can buy a new home. Who’s going to buy your condo so that you can move into the single-family home you so desperately need when Amendment One does absolutely nothing for the first time home buyer – a very important segment of the housing market?

Amendment One creates an incentive to sell, but no incentive for those being penalized – first time buyers and part-time residents – to buy.

This property tax system would continue to shift the tax burden on those who need tax relief the most. Florida House Minority Leader, Dan Gelber, described it best when he compared portability to a pyramid scheme: “You’re in early, you get the best tax rates. You’re in late, you pay for everyone else’s service”.

Yo(landa) Tambien, Mr. MeToo, and those who own a second home in Florida shouldn’t have to pick up the slack for everybody else.

The portability provision, if passed (the amendment needs a 60% tally in order for it to pass), may very well prove to be unconstitutional. Expect lawsuits to surface and years of expensive litigation to follow.

Who fronts the bill for the expensive litigation? Florida taxpayers.

If you purchased a home prior to the housing boom and are looking to move in the near future and feel that the tax benefits offered by the portability provision far outweigh the long-term damages that Amendment One will most definitely produce, by all means feel free to vote YES on Tuesday.

If you demand a tax system that is fair and equitable and one that we, as citizens of this state, can be proud of and market to the rest of the world, vote NO on Tuesday. Don’t bail out most (not all) state lawmakers that are secretly praying and lighting candles to San Lazaro and his dogs in the hopes that they can slip this wolf in sheep’s clothing past us.

If Amendment One passes, you can kiss real property tax reform goodbye. This is what we get – a $240 tax cut and an even larger headache in the future. That’s it.

Prove to the rest of the Union that this is Florida, not Flori-duh.

The opinion expressed in the preceding post is the opinion of Adrian Salgado and is not intended to malign any group, club, organization, company, or individual. The views of the writer are his own and do not, in any way, reflect the views of the broker, principals, or other associates at RED I Realty or RED I Mortgage.

Adrian Salgado is a Realtor Associate with RED I Realty in Miami, FL and can be reached at 305-491-7179 or SalgadoA@gmail.com.

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