The New Frontier in Property Tax Challenges
Tony Beeny embarked upon uncharted territory when he filed a recent petition to challenge his property tax bill.1 W hile taxpayers have been challenging tax bills as long as property has been taxed, Beeny’s position is unique in that he is alleging what few have until recently: that his tax bill is too low.2 B eeny, like several others, is attempting to take advantage of the new portability provision of the Save Our Homes Amendment (SOH Amendment) that was authorized by Florida voters in January 2008. That provision would allow homestead property owners to take their SOH savings with them to new homestead property. Beeny sold his home last year to Jason and Christine Pandolfo.3 A s is typical at closing, each party agreed to pay a prorated portion of the tax bill.4 H e received the tax notice on the old home months later.5 B eeny then realized that he would be receiving little to no portable benefit because the just value of his home was assessed at not much more than what he had paid for it when he purchased the home four years earlier.6 B eeny then filed a petition to challenge the assessment, claiming it was too low.7 I f successful, Beeny stands to net a savings of about $1,500 a year on his tax bill.8 T he Pandolfos are not at all happy about the request, of course, because the higher assessment could cost them as much as $3,000 a year.9
The struggle between Beeny and the Pandolfos illustrates one of the novel set of issues created by the portability provision. As the provision is so new, there is little on point to guide the parties and decisionmakers as they muddle through the quagmire. The key to the mess lies in the answer to the seemingly simpler question of who has the right to challenge a property assessment. On its face, the governing statute states that taxpayers have that right. The issue then becomes who is considered a taxpayer. Unfortunately, the term “taxpayer” is not clearly defined, and the opinions on the matter are few. Considering the courts’ previous opinions on the matter, however, obtaining the opportunity to challenge the assessment may be quite a challenge itself for Mr. Beeny.
SOH Portability Under Amendment 1
• What is the SOH Amendment? — Amendment 1 made changes to the SOH Amendment. In November 1992, Florida voters approved the state constitutional provision which limits increases in assessments of homestead property for tax purposes.10 Each year, property that is entitled to the homestead exemption is assessed at just value as of January 1 of that year.11 The SOH Amendment limits changes in the assessment to the lower of three percent of the prior year’s assessment or the percent change in the Consumer Price Index (CPI) for the preceding year.12 All persons who are entitled to the homestead exemption are qualified for the SOH assessment limitation.13 Persons with legal or equitable title to real estate upon which they maintain their permanent residence are eligible for the homestead exemption.14
The example in Figure 1 on the following page is given to illustrate the application of the SOH cap.
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In the base year, either 1994 — the year the SOH program was commenced, or the year the owner first qualified for the homestead exemption, the assessed value will always equal the just value. The increase in assessed value for every subsequent year is calculated using the previous year’s assessed value multiplied by the lower of either three percent or the CPI for the previous year. In 2007, for example, the CPI for the previous year, at 2.5 percent, was used because it was the lower of the two multipliers. Also, the assessed value cannot exceed the just value.17 In the example above, in 2004, the assessed value should have been $208,691.20 according to the SOH calculation. However, because the just value was only $205,000, the assessed value was limited to that figure.
As demonstrated in the example, the SOH cap can result in tremendous savings to a homeowner, especially during years when there are large increases in market value. Those savings are mitigated by the “recapture rule.” According to the rule, the property appraiser is required to increase the assessment by either three percent or the previous year’s CPI every year that the property’s just value exceeds the assessed value, regardless of whether there has been an increase in just value.18 In the example above, for instance, there was no increase in market value in 2004, but the assessed value still increased. In a declining market, benefits obtained by a homeowner would erode over time until the just value and assessed value are equal.
Even with the recapture rule, however, in the years after the SOH Amendment took effect, many owners found that the longer they stayed in a home to which the SOH cap was applied, the more incentive they had to stay because their property tax savings generally increased. A change in ownership triggers a revaluation.19 Therefore, longtime owners could have a higher tax bill even if they moved to a home of equal value because the new property would be assessed as of January 1 of the year following the change in ownership. In order to remove that deterrent to moving, a new amendment was proposed that would allow owners to take their SOH savings with them.
• Portability Under Amendment 1 — The portability provision allows owners who are already enjoying SOH benefits to transfer savings to another homestead property. In order to calculate the savings transferable to a new homestead that is of equal or greater value than the previous homestead, the assessed value as of January 1 of the year in which the property was abandoned is subtracted from the just value in that year.20 That amount is subtracted from the just value of the new homestead.21 Up to $500,000 may be transferred.22
In 2007, if the owner of the example above transfers his or her homestead to a property with a just value of $350,000, the following calculations would be made to determine the assessed value: $268,000 just value of prior homestead minus $222,921.61 assessed value of prior homestead = $45,078.39 portable savings; $350,000 just value of new homestead minus $45,078.39 portable savings = $304,921.61 assessed value of new homestead.
If the new home is of lesser value than the prior property, the assessed value of the new home is calculated by dividing the just value of the new home by the just value of the prior home and multiplying that figure by the assessed value of the prior homestead.23 However, after making that calculation, if the subtraction of the assessed value from the just value of the new home is greater than $500,000, the assessed value must be increased so that the difference equals $500,000.24
Going back to our example above, if the owner wished to downsize to a property valued at $250,000, the following calculation would be made: $250,000 just value of new homestead divided by $268,000 just value of prior homestead = 0.9328; 0.9328 x $222,921.61 assessed value of prior homestead = $207,949.25 assessed value of new homestead.
In order to take advantage of the portability provision, an owner must transfer the savings within two years of abandoning the prior homestead.25 Also, the provisions do not require the purchase of a new property. The homestead can be transferred between properties already owned. The provision is triggered by the abandonment of one property and the establishment of a new homestead.26
Both the SOH Amendment and Amendment 1 have faced constitutional challenges.27 Prior to placing Amendment 1 on the ballot, the legislature commissioned a study by a team of tax experts on potential legal issues raised by the proposed amendment.28 The team analyzed the amendment with regard to the equal protection clause, commerce clause, interstate privileges and immunities clause, and the right to travel to identify prospective problems.29 The study found that the portability provisions “would be subject to substantial constitutional objections.”30 The team’s most significant concerns were raised by the portability provisions’ potential infringement on the right to travel.31 There is currently at least one case before Florida’s First District Court of Appeal challenging the portability provision’s constitutionality.32 While the merits of that case and any other constitutional arguments regarding portability will not be further explored in this article, it is important to know that those challenges exist.
Taking Full Advantage of SOH Portability
The enactment of the portability provision creates a new realm of property assessment challenges. Prior to portability coming into play, the initial assessment was significant because it served as the base upon which subsequent assessments would be made, and an owner would be best served by assuring it was as low as possible. With the portability provision, the greater the difference between the just value and assessed value at the time of abandonment, the greater the benefit an owner can transfer. It follows that it would be in an owner’s best interest to ensure that the property appraiser sets the just value at the highest possible amount at the time of abandonment. If an owner had enough foresight, he or she would challenge his or her property assessment right before selling the property to assure being able to port the highest amount. Real estate transactions do not always follow a perfect timetable, though, and many owners wishing to take full advantage of the portability provisions will more likely find themselves in the same situation as Tony Beeny.
As stated above, property is assessed each year as of January 1. However, the notice of proposed property tax which shows how the property is assessed is usually not mailed by the property appraiser until much later in the year. Therefore, depending on the timing of a sale of a house, the buyer and seller would each be responsible for a portion of the year’s property tax, and it is possible that at the time of closing neither party would know how much the property is assessed. Prior to the enactment of the portability provisions, both the buyer and seller had similar interests in keeping the assessment as low as possible. In the post-portability world, however, the buyer and seller now have competing interests. The seller wants a high assessment, while the buyer wants a low one. The pivotal question, therefore, is who has standing to challenge the assessment?
Subsection (1)(a) of F.S. §194.181 states that the following parties may be plaintiffs in a tax suit:
The taxpayer or other person contesting the assessment of any tax, the payment of which he or she is responsible for under a statute or a person who is responsible for the entire tax payment pursuant to a contract and has the written consent of the property owner, or the condominium association, cooperative association, or homeowners’ association as defined in s. 723.075 which operates the units subject to the assessment….33
In 2003, the Second District Court of Appeal examined what party could bring a suit to challenge a property assessment in Todora v. Venice Golf Association, Inc., 847 So. 2d 577 (Fla. 2d DCA 2003). Venice Golf Association, Inc., (VGA) had leased property from the City of Venice.34 While the property was assessed in the city’s name, VGA’s lease required it to assume all tax liabilities related to the property.35 VGA filed suit challenging its property assessment to which the county property appraiser responded that the city and not VGA was the proper party to bring the action.36 The court scrutinized subsection (1)(a) of F.S. §194.181, which at the time stated that a “taxpayer contesting the assessment of any tax, the payment of which he or she is responsible for under the law” has standing to bring a tax suit.37 As the term “taxpayer” is not defined in Ch. 194, the court looked to the definition in Ch. 192 which states that a “taxpayer” is a “person or other legal entity in whose name property is assessed.”38 The court concluded that as the property in dispute was assessed in the name of the city, the plain language of the statutes indicated that the city was the proper party to bring the challenge.39
In 2004, shortly after the release of the Todora opinion, §194.181(1)(a) was amended to its current form. While the previous version of the statute limited the potential plaintiffs to “taxpayers,” the current form now allows “other person[s],” including “a person who is responsible for the entire tax payment pursuant to a contract and has the written consent of the property owner….”40 That provision seems to have been added in response to the Todora decision. Under the new version, a lessee like VGA might have the ability to challenge an assessment if it had the consent of the owner.
In 2006, the Florida Supreme Court took another look at the definition of the word “taxpayer” as applied to Ch. 194 in the case of Cason v. Florida Department of Management Services, 944 So. 2d 306 (Fla. 2006),when it examined whether the state could be considered a taxpayer subject to a provision in that chapter.41 In the case, a county tax collector had sold tax certificates for taxes due on property owned by the state.42 When the state moved to enjoin the sale, the persons who had purchased the certificates asserted that the state had failed to challenge the assessments within the 60 days required by F.S. §194.171, the statute which controls taxpayers’ challenges of tax assessments.43 The state argued that because of its immunity from taxation, any assessment on its property was void.44 Because the provisions of §194.171 applied to “taxpayers,” the court looked at the definition of the word to determine whether the term applied to the state.45 Again, because the term was not defined in Ch. 194, the court examined the definition as it appeared in a dictionary and in Ch. 192.46 The dictionary cited by the court defined “taxpayer” as “one that pays or is liable for a tax.”47 Contrary to the Second District Court of Appeal in Todora, the court did not give as much weight to the Ch. 192 definition as the Second DCA had, stating that, while useful, it was not controlling.48 Instead, the court opined that the term must be construed in a way that is “consistent with the statute’s purpose, which is to ensure a reliable and predictable method for counties to collect revenue while also providing for taxpayer challenges to tax assessments.”49 The court concluded that a taxpayer is not only a person in whose name property is assessed but an entity that is taxable.50
Returning to the question at hand, §194.181 allows a taxpayer to bring a suit challenging a property assessment. The problem is determining who exactly is a taxpayer. As the Florida Supreme Court declared in Cason, a taxpayer is not limited to the party in whose name property is assessed. If that was the case, the taxpayer would be the party whose name was attached to the property at the time the property appraiser sent out its notices. The court instead stated that a taxpayer is a taxable entity, “one whom the county has the power to tax subject to disputes about individual assessments.”51 That person is the buyer, the owner of the property. The seller is no longer a taxable entity because his or her legal interest in the property itself ceases to exist after the sale. While a seller usually enters into an agreement at closing that he or she would be responsible for the property taxes for the portion of the year for which the seller was the fee owner of the property, that liability is contractual. If the taxes are unpaid, a lien would attach to the property.52 The seller has no incentive to make sure that the taxes are paid other than his or her contractual obligation. An interpretation of the statute that gives the right to challenge the assessment to the buyer is most consistent with the statute’s purpose of ensuring a “reliable and predictable method for counties to collect revenue”53 because it imparts that right on the party with the most incentive to pay taxes on the property.
Section 194.181 also allows persons “contesting the assessment of any tax, the payment of which he or she is responsible for under a statute”54 the right to bring a tax suit. As stated above, it is a contractual obligation and not a statute that usually requires sellers to pay for a portion of the year’s taxes. The section also allows “a person who is responsible for the entire tax payment pursuant to a contract and has the written consent of the property owner”55 to bring suit. This provision is also of no use to the seller as he or she is neither obligated to pay the entire tax payment nor is he or she likely to obtain the consent of a property owner whose tax bill would likely increase if he or she was successful in an assessment challenge.
Still, as stated, a seller of property is usually obligated to pay some portion of the tax bill, and to deny him or her rights while burdened with responsibility does strike a chord of injustice. One is reminded of the Todora case where VGA was similarly contractually obligated to assume all tax liabilities related to a property. Unlike the sellers at issue in the question at hand, however, VGA was liable for the entire tax bill on an ongoing basis whereas the sellers here are responsible for only a portion of the tax bill for one year. If the court was not swayed to allow VGA the right to challenge an assessment, it would probably be even less tempted to do so in the present situation.
Conclusion
For now, Tony Beeny and his fellow trailblazers will have to wait to see whether they will be given the right to forge ahead on their quest for the greatest portable benefit, but the chances look grim. In the meantime, owners are better advised to have the foresight to petition for challenges while their interest in the property is undeniably theirs.?
1 See Bill Varian, Portability Spews Tax Fight After Sale of Tampa House, St. Petersberg Times, December 1, 2008, at 1A, available at www.tampabay.com/news/localgovernment/article921299.ece?comments=legacy.
2 See id.
3 See id.
4 See id.
5 See id.
6 See id.
7 See id.
8 See id.
9 See id.
10 See Fla. Const. art. VII §4(d).
11 See id.
12 See Fla. Const. art. VII §4(d)(1).
13 See Fla. Const. art. VII §4(d).
14 See Fla. Const. art. VII §6(a).
15 The market value figures in this example are not based on actual data but were instead arbitrarily picked for illustration purposes.
16 As explained above, the assessed value should have been $208,691.20 according to the SOH calculation. However, because the assessed value cannot exceed the just value, the assessed value was limited to $205,000.
17 See Fla. Const. art. VII §4(d)(2).
18 See F.A.C. §12D-8.0062(5).
19 See Fla. Const. art. VII §4(d)(3).
20 See Fla. Const. art. VII §4(d)(8)(a)(1).
21 See id.
22 See id.
23 See Fla. Const. art. VII §4(d)(2).
24 See id.
25 See Fla. Const. art. VII §4(d)(8)(a).
26 See Fla. Stat. §193.155(8).
27 See Fla. League of Cities v. Smith, 607 So. 2d 397 (Fla. 1992); In re Advisory Opinion to the Atty General — Homestead Valuation Limitation, 581 So. 2d 586 (Fla. 1991); Alex Leary, Portability Faces Challenge, St. Petersberg Times, February 13, 2008, at 1B.
28 See Walter Hellerstein, W. Scott Wright, and Charles C. Kearns, Legislative Office of Economic & Demographic Research, Legal Analysis of Proposed Alternatives to Florida’s Homestead Property Tax Limitations: Federal Constitutional Legal Issues (February 15, 2007), available at http://edr.state.fl.us/propertytaxstudy/AdValoremiterimreport.pdf.
29 See id.
30 See id.
31 See id.
32 Robert Bruner et al. v. Bert Hartsfield et al., Case No. 1D08-5524 (Fla. 1st D.C.A. 2008). See Alex Leary, Portability Faces Challenge, St. Petersberg Times, February 13, 2008, at 1B.
33 Fla. Stat. §194.181(1)(a).
34 Todora, 847 So. 2d at 578.
35 See id.
36 See id.
37 See id. (citing, Fla. Stat. §194.181(1)(a)(1999)(emphasis supplied)).
38 See id. at 579 (citing, Fla. Stat. §192.001(13)(1999)).
39 See id.
40 Fla. Stat. §194.181(1)(a).
41 Cason, 944 So. 2dat 308.
42 See id.
43 See id. at 308-309.
44 See id. at 309.
45 See id. at 312.
46 See id. at 313.
47 See id.
48 See id.
49 Id.
50 See id.
51 Id.
52 See Fla. Stat. §197.122(1).
53 See Cason, 944 So. 2d at 313.
54 Fla. Stat. §194.181(1)(a).
55 Id.
Stephen A. Bailey, prior to starting Lehrman and Bailey, P.L., worked as an eminent domain trial attorney for a large statewide law firm representing owners against the government. Mr. Bailey also worked as an eminent domain trial attorney for the Office of the Attorney General representing the Department of Transportation in its acquisition of properties. He is a Florida Supreme Court certified circuit and county court mediator and teaches real estate law, real estate appraisal, real estate principles, and business law at the Florida State University College of Business.
