CONSIDERATIONS FOR PROPERTY OWNERS: THE HOMESTEAD EXEMPTION'S COMMERCIAL COUSIN
Anyone who has owned property knows that the cost of a mortgage is only the tip of the iceberg when it comes to the expenses of owning property. Loan interest rates, insurance and taxes can take an affordable bit of land and make it an untenable, or unprofitable, venture. With interest rates low, property purchases are on the rise, we are in a seller's market![1] However, back when the economy was not in such great shape, the Florida Legislature passed a set of amendments to the Florida Constitution to encourage investment in real property. One of these amendments, the value cap on homestead property, is so ubiquitous that almost anyone would know about it. Conversely, there is a similar provision for commercial property that seems to be missing out on its fair share of attention.
On the residential property side, it is fairly well-known that real property owned in Florida, and registered as one's homestead, is afforded certain considerations. These include a protection from creditors, an exemption on property value for calculation of ad valorem tax, and, most notably, the cap on increases in value. The 1992 amendment to the Florida Constitution, Article VII Section 4(d), colloquially known as the Save Our Homes amendment, provides that the assessed value of homestead property shall not increase by the lesser of Consumer Price Index or 3% of the prior year's valuation.
Slightly less well-known is that the Florida Constitution has a similar provision that applies to commercial property. Specifically, in 2008 the Legislature passed an amendment to the Florida Constitution, Article VII, Section 4(g) and (h) provide that assessments to commercial property shall be capped at a 10% increase from the prior year. This applies both to residential real property of less than 9 units and commercial property.
Also similar to homestead on residential real property, the cap on commercial property assessments can be lost when a change in ownership or control occurs. The Constitutional provision provides that after a change in ownership or control the property will be reassessed at the just value as of the next assessment date.[2] The Florida Statutes define "change in ownership or control" as a sale of more than 50% of the property. This is a major consideration for a taxpayer seeking to transfer a property currently held personally into the name of an entity, transfer a homestead from a property that they will continue to own, or transfer ownership of a property between entities. For example, in Orange County Property Appraiser v. Sommers[3], the Sommers moved out of their home, and transferred the homestead to their new property. As such, the original property was reclassified to non-homestead residential property. The County Property Appraiser reassessed the property from its value under the prior homestead of $134,000, to its just value of $279,000. This value exceeded a 10% cap from the prior year value. The Sommers filed suit. On appeal, the Fifth DCA held that the 10% cap does not apply in the year the property's classification was changed from homestead to non-homestead, and that the parcel should be reassessed at just value. From that point, the 10% cap would apply, however that transfer caused the Sommers property to be reassessed, and value to go up by over 100%.
In addition to the change in ownership provision, qualifying improvements made to a property, which increase the property value in excess of 25%, will be assessed at just value. A qualifying improvement is any improvement to the property, completed on January 1, which increases the value of the property by at least 25%. While the original parcel will not lose the 10% cap, the addition will be assessed, and then subject to a 10% cap on that value on a go-forward basis.
The cap on property tax increases is an incentive to owners of commercial property. It helps keep this one component of ownership expense predictable from one year to the next so long as commercial property owners are aware of the limitations on transfers of ownership. However, the caveat would be that while money is cheap and the economy is more stable, it seems to disincentivize owners from putting money into improving currently owned property. The initial expense could cause a sticker shock come January, when the assessments come out.
At the Law Office of the Law Offices of Moffa, Sutton, & Donnini, P.A., our primary practice area is Florida taxes. We represent taxpayers and business owners from the entire state of Florida, from Department of Revenue to County Property Appraisers and Tax Collectors. Call our offices today for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.
About the author: Ms. Levine is an associate attorney with the Law Offices of Moffa, Sutton, & Donnini, P.A. Her primary practice area is Florida tax controversy, with focus on real property issues. Ms. Levine received a B.S. in Accounting from University of Central Florida. She spent several years working in public accounting before attending Nova Southeastern University Law School. She received her Juris Doctorate in 2014. During her time at Nova Law, Ms. Levine was the Executive Justice of Academics for the Moot Court Honor Society, as well as the Finance Chair. She was awarded by the National Order of the Barrister, a national honor society which encourages oral advocacy and brief writing skills.
AUTHORITY
Fla. Const. Art. VII Section 4(d) – Save Our Homes Amendment
Fla. Const. Art. VII Section 4(g)(1), (3) – Cap on valuation of Residential Real Property less than 9 Units
Fla. Const. Art. VII Section 4(h)(1), (3) – Cap on valuation of commercial real property
Florida Statutes 192.042 – Date of assessment
Florida Statutes 193.1554(4), (5) - Assessment of nonhomestead residential property.
Florida Statutes 193.1555(3), (5) - Assessment of certain residential and nonresidential real property.
Orange County Property Appraiser v. Sommers, 84 So.3d 1277 (Fla. 5th DCA 2012)..
ADDITIONAL RESOURCES
Miami-Dade Property Owners Take on Tax Collector, published April 11, 2015, by Amanda Levine, Esq.
Florida Homestead Tax Exemption Case – Mary Jane, published March 15, 2015, by Amanda Levine, Esq.
Florida Commercial Property Owners Get Blindsided By Sales Tax, published Dec 31, 2011, by James Sutton, Esq.
[1] My realtor tells me this regularly, he thinks it will make me patient in looking for a home. He is well intentioned, but wrong.
[2] Real property is assessed as of January 1 of each year per Section 192.042, Florida Statutes