Protecting and preserving the Save Our Homes cap.

• Author: Franklin, Richard S.

The so-called "Save Our Homes" amendment to the Florida Constitution sets a three percent maximum limit on annual valuation increases of homestead property for ad valorem tax purposes. This limit or cap on annual valuation increases saves untold numbers of Floridians thousands of dollars in tax, and in some cases tens of thousands of dollars of tax. Statewide in the year 2002 the Save Our Homes (SOH) cap protected about $80 billion in assessed value from taxation. That is up 68.50 percent over the year 2001, when it was about $47.9 billion. (1)

The mounting importance to the SOH cap is becoming apparent with the enormous and growing gap between just value and the protected taxable value as Florida real estate appreciates. Some owners of protected homestead properties are opting to stay in their existing homes because the taxes are so low as compared to selling and buying properties of comparable value. Eventually this trend may affect the real estate market in reducing inventory and sales.

The protection from escalating property taxes offered by the SOH cap is a significant tax break available to Florida residents. Anyone considering purchasing a home in Florida or residing in Florida, as a resident or nonresident, needs to understand the implications of the SOH cap on property taxes. Professional advisors need to consider the effect of the SOH cap in any tax or domicile analysis. In many cases, the tax savings offered by the SOH cap may be more significant than the income tax of another state and more significant than the Florida intangibles tax. Suffice it to say that the SOH cap is one of the most valuable rights available to Florida residents.

What is the SOH Amendment?

The SOH Amendment is a state constitutional provision approved by the citizens of Florida on November 3, 1992, designed to limit the annual valuation increases to homestead property for ad valorem tax purposes. (2) Article VII, [section] 4(c) of the Florida Constitution provides:

(c) All persons entitled to a homestead exemption under Section 6 of this Article shall have their homestead assessed at just value as of January 1 of the year following the effective date of this amendment. This assessment shall change only as provided herein.

(1) Assessments subject to this provision shall be changed annually on January 1st of each year; but those changes in assessments shall not exceed the lower of the following:

1. Three percent (3%) of the assessment for the prior year.

2. The percent change in the Consumer Price Index for all urban consumers, U.S. City Average, all items 1967=100, or successor reports for the preceding calendar year as initially reported by the United States Department of Labor, Bureau of Labor Statistics. (emphasis added)

The provision became effective on January 5, 1993. On January 1, 1994, all property was assessed at just value. (3) Subsequently, assessments of properties subject to the SOH amendment would change annually on January 1 of each year, but those changes in assessments could not exceed the lower oo three percent of the assessment for the prior year or the percentage change in the consumer price index. Therefore, 1995 was the first ,year the SOH cap limited the assessed valuation increases on Florida homestead properties. (4)

As the first sentence of [section] 4(c) of Article VII of the Florida Constitution indicates, the SOH cap is available to all persons who qualify for the homestead tax exemption under [section] 6 of Article VII of the Florida Constitution. This section of the Florida Constitution provides in part:

(a) Every person who has the legal or equitable title to real estate and maintains thereon the permanent residence of the owner, or another legally or naturally dependent upon the owner, shall be exempt from taxation thereon, except assessments for special benefits, up to the assessed valuation of five thousand dollars, upon establishment of right thereto in the manner prescribed by law. The real estate may be held by legal or equitable title, by the entireties, jointly, in common, as a condominium, or indirectly by stock ownership or membership representing the owner's or member's proprietary interest in a corporation owning a fee or a leasehold initially in excess of ninety-eight years.

It is important to recognize that there is a separate body of law addressing the homestead tax exemption from that addressing the homestead creditor protection under Art. X, [section] 4 of the Florida Constitution. The statutory scheme and procedures to qualify for the homestead tax exemption are found in F.S. Ch. 196, and Florida Administrative Code Ch. 12D-7. (6)

The homestead exemption reduces the taxable value of real property by up to $25,000. To qualify, as of January 1 of the year for which the individual is applying for homestead status, the individual must be a permanent resident of Florida, must own and occupy the property as his or her permanent residence, and must hold legal or equitable title to the property.' The homeowner must also file an application for the homestead exemption with the local property appraiser on or before March 1 of such year. (8)

Properties that receive the homestead exemption automatically qualify for the SOH cap and may realize additional benefits. Additionally, in a recent case, Powell v. Markham,--So.2d--28 Fla. L. Weekly D1448a (June 18, 2003), the Fourth District Court of Appeal held that the homeowners were entitled to the SOH cap even though they failed to timely file a homestead application. The court analyzed that "the entitlement to a homestead exemption, for the purpose of seeking application of the Save Our Homes cap, is not limited to homeowners that have actually applied for and been granted a homestead exemption, but includes all homeowners who qualify for and thus are entitled to a homestead exemption."

Example of SOH Cap

In the example below, the homeowner meets requirement for homestead on January 1, 1999, and applies for homestead status in February 1999:

In the example, the percentage adjustment on 1/1/2000 is shown as 2.7 percent and not three percent. That is because the SOH cap for any particular year is the lower of the percentage change in the consumer price index (CPI) for the preceding year or the flat three percent adjustment limit. For the year 2000, the percentage change in the CPI was 2.7 percent. In the history of the SOH cap, only in 1997 and 2001 has the percentage change in the CPI been greater than the flat three percent adjustment limit. The CPI change amounts shown in the chart below are from the year prior to the year listed. (9)

Under the recapture rule, property appraisers must raise the assessed value of a qualifying homestead property by the maximum of three percent or the percentage change in the CPI, whichever is less, on all properties assessed at less than full market value whether or not that property's value increased during the calendar year. For example, property A's market value increases by 10 percent this year. As a homestead property, the property appraiser can only increase the value by three percent or CPI, which ever is less under SOH. In the next year, property A's market value did not change. Since its assessed value under SOH remains under market value, the property appraiser must increase the assessed value by three percent or CPI, which ever is less, to bring its value closer to full market value.

SOH Disclosure in Real Estate Sales

There is a growing concern among lawyers that buyers of properties in Florida are made aware of the SOH cap and its implications for the buyers' tax liability after the sale. There is potential liability for all those involved with the sale of a property for not advising the buyer that his or her tax bill may be dramatically higher than that of the seller. Several legislative bills were introduced in February 2003 that would require sellers, real estate brokers, and salespersons to disclose to the purchaser of residential property in writing that 1) the ad valorem taxes subsequent to the purchase may be in excess of the taxes assessed at the time of sale, and 2) the ad valorem taxes are required to be assessed at just value of the property in the year following a sale if a change of ownership occurred. The proposed laws would also require the purchaser to sign a disclosure at or prior to the time of the acceptance of the offer. (10) However, these bills died in committee on May 2, 2003.

Placing a statutory burden on sellers, real estate brokers, and salespersons, as proposed by pending legislation, would not necessarily exonerate the closing agent or the purchaser's attorney from Liability. While a closing agent has a duty to conduct the closing in a reasonably prudent manner," does that now include adding to the checklist a discussion of the purchaser's potential increase in taxes?

The...