Save Our Home Cap… Are you Saving Anything?
Most people understand the savings of their homestead tax exemption because the “exemption” is printed on the real estate tax bill but do you understand how the Save Our Home (“SOH”) cap works?
Chapter 196 of the Florida Statutes allows each person who has legal or beneficial title in equity to real property and who lives on the property a homestead tax exemption from taxation on the residence and contiguous real property. Prior to the recession increases in real estate values (and the corresponding increases in real estate taxes) could effectively force a person out of their house because they could not afford the increase in the real estate taxes even with the homestead tax exemption.
In 1992 a constitutional amendment, Section 4 of Article VII of the Florida Constitution, was adopted which limits the annual increase in the assessment of homestead property for purposes of determining real estate taxes to the lesser of 3% or the percentage change in the Consumer Price Index.
An example can illustrate. Assume your home is worth $250,000 and the real estate taxes are $1,000. In year 2 your home value increases to $400,000 and your real estate taxes increase to $3,000. Many homeowners could not afford to keep their home because of the huge increase. The Constitution now states that, for purposes of real estate tax assessment, the value of the home can only be increased by 3% (assuming that the CPI was higher). Thus, the value of your home for calculating real estate taxes would only increase by 3%. In our example the home value will only increase by $7,500 ($250,000 time 3%), so the value in year 2 would only be $257,000 instead of $400,000 for real estate tax purposes. In an economy with rising house prices this SOH cap was VERY valuable. No one wanted to lose their SOH cap, and many attorneys spent their time in the early 2000s planning on how to avoid the loss of the SOH cap.
Further, many people would not sell their home because, upon sale, the SOH cap came off under Section 193.155 of the Florida Statutes. Once the SOH cap came off then the homeowner would have to start fresh on the purchase price of the new house, and the real estate taxes could be substantially more, especially for people who lived in their homes for 20-30 years! This effectively “froze” the real estate market because people could not afford to leave their homes.
In 2008 Floridians voted to allow for “portability” of the SOH cap. It is a complicated formula, but now Florida homeowners can “port” their SOH cap over to their new home. Unfortunately, in recent years because of the recession, the SOH cap has not been as important but with the upturn in the economy, issues regarding the SOH cap may return.
It is important to remember, however, that a sale of your home is not the only way to transfer ownership and lose the SOH cap. Upon death there WILL be a transfer of ownership, so it is important to understand when the SOH cap comes off and when portability may NOT apply. For example, if a home is held jointly with a husband and wife, when the husband dies and the spouse is now the sole owner the SOH cap will NOT come off. However, if, at the surviving spouse’s death, the same home is transferred to children the SOH cap WILL come off and portability can not be used.
As you can imagine, many parents have lived in their home MANY years and enjoy the benefits of the SOH cap. Unfortunately, when children receive the home they may get a huge shock when they receive the real estate tax bill. Thus, it is very important to discuss the SOH cap with your adviser. In many cases there will be a forced sale because the children just can’t afford to pay the real estate taxes.
ADVICE: Always be sure that you have filed your homestead exemption in a timely manner, review your real estate tax bill BEFORE you purchase a new home to be sure you understand how your purchase will affect your real estate tax bill AND be sure to discuss these issues with your adviser to determine the best way to handle the transfer of your home upon death.
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