Saturday, January 29, 2022

Renting Homestead Might Lose Tax Breaks

Law Matters

Among the benefits of becoming a Floridian are protections and special tax treatment afforded homestead property. Homestead is the permanent residence of a person or persons dependent. 

The Florida Constitution gives a lot of attention to homestead property. Article X, Section 4 (a) prohibits forced sale of homestead by creditors of the owner. Article X, Section 4 (c) protects spouses and minor children with limits on transfer or devise of homestead property. The constitutional provision which most in Florida appreciate is found at Article VII, Section 6, which provides homestead property tax exemptions. 

The Florida Constitution provides an exemption from property tax, except assessments for special benefits, on the assessed valuation of $25,000 and for all property taxes except those levied by school districts for assessed valuation greater than $50,000 and up to $75,000 “upon establishment of right thereto in the manner prescribed by law.” The quoted portion of the Constitution means the homestead tax benefit is not automatic but must be obtained through filing requirements of Florida statutes. Those statutes require an application for homestead benefits with the Property Appraiser in the County where the property is located. 

Unlike the Constitutional protection from creditor claims, there is no limit on the size of a homestead to benefit from the property tax exemption. The Constitution uses a financial limit instead. The procedure is left to the legislature and the legislature has adopted rules in chapter 196 Florida statutes. 

Section 196.0150 Fla. Stat. confirms permanent residency is a factual determination to be made by the County property appraiser. It lists relevant factors that may be considered by the property appraiser to include: 

  1. Applicant recordation of a formal declaration of domicile in the public records 
  2. Evidence of where the applicant’s dependent children are registered for school 
  3. Place of the applicant’s employment 
  4. Previous permanent residency of the applicant 
  5. Proof of voter registration 
  6. Valid Florida driver’s license and relinquishment of driver license from any other state 
  7. Issuance of Florida license plates 
  8. Address on federal income tax return 
  9. Location where applicants bank statements are registered 
  10. Proof of payment for utilities at the pertinent property 

Florida statutes property tax provisions also define real estate used and owned as homestead to mean real property to the extent provided in the Florida Constitution, less any portion used for commercial purposes and specifically states that property rented for more than 6 months is presumed to be used for commercial purposes. Statutes also confirm the status of property on January 1 determines if it is homestead for the entire year for tax purposes. Application for exemption must be filed with the property appraiser before March 1 of the year for which the exemption is claimed. 

Permanent residence seems clear enough, but in the quest for property tax benefit, it seems that some Floridians get confused. In the case of Baldwin v. Henriquez, the Baldwins sold their homestead and bought a replacement property. They demolished the existing house on the replacement property and started building a new home. While building the home they rented a condominium, but they did use the dock at the new location. When they realized the replacement home would not be finished before January 1 of the next year, they pitched a tent on the property on December 26 and spent two nights in the tent before they gave up on that idea. Their driver’s licenses and voter registration cards listed the new property for the new location. About 6 months after January 1, a certificate of occupancy was issued for the new house. 

The Baldwins timely applied for homestead, but their application was denied by the property appraiser. Off to court they went, claiming the property appraiser focused too heavily on their lack of physical occupancy. They claimed they were entitled to the homestead exemption because they were unable to physically occupy the property but had manifested intent to establish permanent residence on the property. Unfortunately for the Baldwinsthe court disagreed and so did the appellate court. 

The Constitution, statutes and cases take a different approach to rentals. As referenced above, rentals of more than 6 months are presumed commercial and disqualified. However, even shorter rentals can be problematic. Section 196.061 of Florida State provides that rental of all or substantially all of dwelling constitutes abandonment as a homestead and the abandonment continues until the dwelling is physically occupied by the owner. The statute provides an exception. If the rental abandonment occurs after January 1 of any year, it does not affect the homestead exemption for that year unless the property is rented for more than 30 days per calendar year for 2 consecutive years. 

The statute seems a strange exemption from the requirement that the owner make homestead the owner’s permanent residence. Why? It is there to protect people who live in areas where there are big events that are so big that they require housing for a short period to accommodate the event and are so well attended that the attendees will pay huge rent. The attendees will pay so much rent that it warrants a homeowner packing up and renting his or her home for significant rental income from the event. What might those events be? Perhaps the Daytona 500 NASCAR Race, Bike Week in Daytona, Fantasy Fest in Key West, Super Bowl or major sports events and others. 

The legislature decided to let people rent their homes on a short-term basis for really big money without losing their homestead tax break. Good for the economy by providing housing for events and good for the folks who are willing to be inconvenienced because the income is so good. But remember, the statute includes a 30 day per year rental limit. 

Times are tough for some right nowCOVID19 has put a lot of people out of work and many could use some extra income. What about renting a room or rooms? Let’s not worry about whether someone can do that under local ordinances, as that is not an issue for this column. However, if you rent a room in your home, will the home still qualify as homestead? And, if it does, is the tax break reduced? The answers can be found in Florida court casesone of the best being Karayiannakis v. Nikolitis. 

In the Nikolitis case, Ms. Karayiannakis resided in a six-unit apartment building and rented 5 of the 6 units. The sixth unit was her permanent residence. She claimed the entire building and surrounding land as homestead for property tax purposes. The property appraiser measured the dimensions of the building and determined the unit she occupied was about 37% of the building’s total footprint. The property appraiser limited her homestead claim to 37% of the land and improvements. 

As long as 37% of the value of the apartment building was sufficient to include the $50,000 property tax exemptions in the Constitution, one might think that Ms. Karayiannakis would be happy. However, that would overlook the importance of the Save our Homes Constitutional Amendment. That amendment limits the increase in assessed value of homestead property for tax purposes to the lesser of 3% per year or percent change in the Consumer Price Index. 

Ms. Karayiannakis wanted that benefit, so she went to court. Alas, she lost. The court explained that exemption from creditor claims cases had divided homestead property into permanent residence and commercial portion where it was feasible to do so and that it saw no reason the same logic should not apply to tax cases. 

Long-term rental of an entire home will clearly lose the homestead benefit. Rentals of 30 days or less in any given year are protected by statute. Rental of a portion of homestead property apparently limits the part of the property which qualifies for special tax treatment. That means, a homeowner wanting a little more income should be careful if renting part or all of the homestead is part of that plan.  

William G. Morris is the principal of William G. Morris, P.A. William G. Morris and his firm have represented clients in Collier County for over 30 years. His practice includes litigation and divorce, business law, estate planning, associations and real estate. The information in this column is general in nature and not intended as legal advice.  

One response to “Renting Homestead Might Lose Tax Breaks”

  1. Austin Smith says:

    Thanks for informative article. Since you’re claiming rental income, it stands to reason you can also claim your losses to offset your tax burden, as you would with any business.

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