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Welcome, Stranger: Florida Greets Newcomers With Higher Taxes

Although Florida is considered a tax-friendly state, new residents won’t feel so welcome when they receive their first property tax assessments.

About 1,000 people move to Florida each day, according to state statistics. With warm temperatures year-round and no state income, estate or inheritance taxes, it’s easy to see why so many are attracted to the Sunshine State. In addition, on Jan. 1, Florida repealed its intangible tax, which was based on the value of residents’ stocks, bonds, mutual funds, money market funds and certain other intangible assets. Florida homeowners are subject only to sales and property taxes. The latter, however, often raises the blood pressure of new residents, who are blindsided by their large bills.

The Homestead Exemption And Save Our Homes

Florida offers a homestead exemption of $25,000 to every person who owns a permanent residence in the state and declares the state as his or her domicile. Florida statutes define permanent residence as “the place where a person has his or her true, fixed, and permanent home and principal establishment to which, whenever absent, he or she has the intention of returning.” A person may have only one permanent residence at a time. The county appraiser’s office determines the “just,” or fair market, value of the permanent residence and subtracts the exemption to arrive at the taxable value, to which local government property tax rates are applied.

The state also offers an additional exemption of up to $25,000 to residents age 65 and older whose household incomes are less than $25,000. Additional $500 exemptions are available to widows and widowers, to blind persons and to the totally or permanently disabled as long as they are bona fide Florida residents. Ex-service members who are at least 10 percent disabled as a result of war or a service-related incident are entitled to an additional $5,000 homestead exemption.

The homestead exemption itself is not the cause of all the ire, but rather the Save Our Homes (SOH) amendment that limits the annual increase in the assessed value of homestead property to the lower of 3 percent or the percentage change in the Consumer Price Index. The amendment, which took effect in 1995, was the result of a campaign spearheaded by Kenneth Wilkinson, a property appraiser from Fort Myers, Fla. During the 1980s, property values in various sections of the state were experiencing annual percentage increases in the double digits. Mr. Wilkinson initiated the campaign in an effort to protect permanent residents, retirees in particular, from the possibility of losing their homes to property taxes.

By passing the Save Our Homes amendment, Florida created a dual property-tax system that primarily benefits longtime owners of homestead property who have no intention of moving. However, it penalizes new residents and snowbirds who spend the winter in their Florida homes to escape the cold weather in the Northeast and Midwest. As a result, neighbors living in identical homes may receive substantially different tax bills. Many new residents are paying as much as double or triple the tax that a person living across the street has to pay. It is simply a matter of how long the neighbor has owned the homesteaded property. This disparity is attributable to the difference between the fair market value and the taxable value of the longtime resident’s home (the Florida Department of Revenue refers to this as the “SOH differential”), which increases as assessed values continue to climb.

According to the New Home Buyer’s Tax Estimator on the Broward County Property Appraiser’s Web site (www.bcpa.net/TaxCalc.asp), a new home buyer who has purchased a $500,000 residence should expect a property tax assessment of about $9,945 (or 2 percent of purchase price), based on the average countywide rate. This tax estimate does not adjust for someone with a homestead exemption. However, the Web site states that if the new resident files and obtains a homestead exemption, he or she will save about $580 in taxes during his or her first year of ownership.

The Save Our Homes amendment has caused many of the residents it was meant to protect to become prisoners in their own homes. Some longtime residents with large SOH differentials would like to trade up or down into new homes within Florida, but cannot because the increase in property taxes would be too costly. Once they moved, they would have to reapply for homestead exemptions for their new residences. More important, the SOH differentials that have accumulated over the years could not be applied to their new homes. Numerous amendments have been proposed to make the SOH differential portable, but none has been passed to date.

Former Gov. Jeb Bush formed the Property Tax Reform Committee last year to address the growing frustration over Florida’s current property tax system. The committee recommended 12 possible solutions, including: capping the tax growth for all individual properties, not just homestead properties; replacing the property tax with other forms of taxation, such as a higher sales tax; assessing properties using a moving average of several years’ assessments to reduce the effects of steep one-year spikes in value; increasing the homestead exemption; allowing homeowners to transfer their tax savings under Save Our Homes when they buy new homes (portability); and phasing out the Save Our Homes tax preference to address the tax inequities among neighbors. However, residents and snowbirds should not expect immediate changes. Most of these suggestions require voters to approve an amendment to the state constitution, which is not likely to happen before 2008.

What Should New Residents Do?

If you recently moved to Florida, and own your home, apply for the homestead exemption as soon as possible. First submit an affidavit of domicile stating that your Florida home is your permanent residence. Second, if you have not already done so, change your vehicle registration, obtain a Florida driver’s license and register to vote in Florida. Then go to your county property appraiser’s office and file a homestead exemption application. Generally, you must file between Jan. 1 and March 1 for the exemption to take effect in the same year. The Save Our Homes growth cap does not take effect until the year after you receive the exemption.

Because of the real estate boom in Florida over the last few years, property taxes have become a major concern for many homeowners. Fortunately, new residents who apply for homestead will eventually benefit from the exemption and the Save Our Homes amendment under the current system. Snowbirds can only hope that residents will be generous and vote for a property tax amendment during the next state election that will benefit them as well. In the meantime, they will have to consider high property taxes as the price for getting out of the cold each year.

Executive Vice President and Chief Operating Officer Shomari D. Hearn, based in our Fort Lauderdale, Florida headquarters, is among the authors of The High Achiever’s Guide To Wealth. He contribued to Chapter 12, “What Estate Planning Documents Do I Need?" and to Chapter 17, "Living And Working Abroad." He also contributed several chapters to the firm’s book for adults age 55 and older, Looking Ahead: Life, Family, Wealth and Business After 55.