Homestead: More than Just a Property Tax Exemption

BY: Kevin R. Albaum, ESQ.
Clark, Campbell, Lancaster & Munson, P.A.

Most people know that there is a tax break available to them on their home (house, condominium, co-ops apartments, and some mobile home lots also qualify).  The way it works is that a tax exemption can be applied for at the local property appraiser’s office on a person’s home if the person owns and lives in the home that they are trying to obtain the exemption on by January 1 of the year they are trying to claim the exemption.

The tax exemption provides that the first $25,000 of the assessed value is exempt from real property taxes and the third $25,000 of the assessed value is exempt as well.  The tax exemption provision is a nice perk provided by the Florida Constitution (Article VII, Section 6) to Floridians and can easily save a Polk county resident hundreds or possibly over $1,000 per year in property tax owed.  However, the property tax exemption provision is just one of the benefits of owning a homestead property in Florida.

So, what exactly is a homestead?  Article VII of the Florida Constitution further explains the property tax exemption and defines homestead as real estate held by a person who maintains title to the property and maintains permanent residence thereon. Further, you only get one (1) homestead property per individual or family unit. The Florida Constitution has another provision on homestead property (Article X, Section 4) which adds that for creditor protection, homestead property can be up to 160 contiguous acres outside of a municipality or up to (1/2) one-half acre if the residence is located within a municipality and owned by a natural person.  Article X goes on to add restrictions on the devise of a homestead property if you have a spouse or minor child.  For example, if you are married and own a house (in your name only) but your spouse lives in your house, it is likely that you cannot convey the homestead property without your spouse signing the deed as well.

Is my homestead protected from creditors?  Specifically, if your property qualifies for homestead status and fits within the definition under Article X, regardless of the home’s value, it is exempt from the forced sale by any court and protected from judgments of your creditors (except for the payment of tax liens, mechanic’s liens, HOA liens or mortgages).  For example, if you get a new roof put on your house and don’t pay the roofer, you will most likely not have homestead creditor protection against the roofer.  Additionally, if a person files for bankruptcy, a different set of rules for creditors pursuing the homestead property will also apply.

Can I transfer my homestead to my trust or my business?  Many Florida court cases have found a revocable living trust can own a natural person’s homestead property and maintain Article X creditor protections.  However, many other entities and types of trusts cannot own a homestead property and also maintain creditor protection.  For example, you can’t transfer your home to your limited liability company and expect to maintain homestead creditor protections for your home if your limited liability company is sued in the future.

Calling Florida’s homestead laws complex would be a drastic understatement and when questions arise regarding whether or not your home: 1) Qualifies for the Article VII tax exemptions; 2) Qualifies for the Article X creditor exemptions or 3) Has Article X restrictions on whether or not there are restrictions on devising the property, it is always best to speak with an attorney who has experience in this area to look at your specific situation and properly advise you on your home.

Kevin Albaum is an attorney in the Elder Law Practice at Clark, Campbell, Lancaster & Munson, P.A. Questions can be submitted online to thelaw@cclmlaw.com.

Collecting Taxes on Collectibles

By:  Clark, Campbell, Lancaster & Munson, P.A.

Do you have a collection that you wish to sell? If so, the IRS may determine that your collection is composed of “collectibles” and apply a 28% capital gains tax rate to any gain you may acquire from the sale of your collection. Generally, for most taxpayers, the capital gains tax rate is 15%.

Q: What are collectibles?

A: The IRS has stated that the following are collectibles:

  1. Works of art;
  2. Rugs;
  3. Antiques;
  4. Metals;
  5. Gems;
  6. Stamps;
  7. Coins;
  8. Alcoholic beverages;
  9. Musical instruments;
  10. Historical objects; and
  11. Any other tangible personal property specified by the Secretary for purposes of this subsection.

Notably, comic books, toys, and cars are not explicitly provided in the above list. However, the IRS has the discretion to consider such items as collectibles depending on the facts and circumstances.

 

Q: What is an example of tangible personal property that the IRS may consider a collectible?

A: Taxpayer collects dolls from a popular toy company and keeps her collection in a climate controlled storage unit. Taxpayer sells five dolls from her collection for $1,000.00. Taxpayer’s dolls may be considered a collectible if taxpayer’s treatment of her collection indicates that she is attempting to preserve her collection’s value, the collection has considerable value, the dolls are sought after collectors, and the taxpayer has no personal use for the dolls.

 

Q: I have an item that is considered a collectible; will I automatically be subject to the 28% capital gains tax rate for any gain I may acquire from the sale of my collectible?

A: Not necessarily. In order for the 28% capital gains tax rate to apply, the item must be held by the taxpayer for more than a year. For example, if taxpayer bought a collectible in January 2017 and sold the same collectible in April 2017 for a profit, then the sale will not be subject to the 28% capital gains tax rate because taxpayer held the collectible for less than a year. Instead, the sale of the collectible will likely be taxed as ordinary income.

 

Q: How do I determine basis in my collectible?

A: It depends on how the collectible was acquired. For example, taxpayer’s great grandmother bought a collectible in 1960 for $3.00, and at the time of her death, the collectible was valued at $1,000.00. If taxpayer inherited the collectible from her great grandmother, then taxpayer’s basis in the collectible will be its fair market value at the time of inheritance, which is $1,000.00. If taxpayer’s great grandmother gifted the collectible during her lifetime to the taxpayer, then taxpayer’s basis in the collectible will be her great grandmother’s basis in the collectible, which is $3.00. If taxpayer bought the collectible from an auction, then taxpayer’s basis in the collectible will be the amount taxpayer paid for the collectible, plus any auction fees. Finally, a taxpayer’s basis in a collectible may increase due to maintenance and restoration costs to preserve the collectible’s value.

 

Q: Are there any other tax consequences that I should consider?

A: Yes. Generally, collectibles are sold at a loss. Whether a taxpayer will be able to claim a loss from the sale of a collectible will depend on whether the taxpayer personally used the collectible and whether the taxpayer is engaged in a hobby or a business.

If you are unsure whether you have a collectible or whether you may claim a loss from the sale of your collectible, it is advisable to seek counsel from a tax professional.

Federal Historic Tax Credit

By: Clark, Campbell, Lancaster & Munson, P.A.

 The Federal Historic Tax Credit, currently at 20%, is a form of public policy to encourage the preservation and rehabilitation of older buildings. Before the Federal Historic Tax Credit, there was no financial incentive to restore or rehabilitate older buildings. In fact, it was more financially beneficial to demolish such buildings so that the owner could take advantage of a deduction related to their demolition.

Q:        What are the general requirements for the Federal Historic Tax Credit?

The building must be a certified historic structure. A certified historic structure is any building which is either: (1) listed in the National Register of Historic Places, or (2) located in a registered historic district and certified as being of historical significance to the district.

The building must be placed in service before the beginning of the rehabilitation. The placed in service date generally determines which taxable year the credit may be allowed. The placed in service date is when the appropriate rehabilitation has been completed whereby occupancy of the building would be allowed. If the building is still in service or occupied during the rehabilitation, the placed in service date will be the rehabilitation project completion date.

The building must be substantially rehabilitated. The Historic Tax Credit is not available to owners or lessees who make minor restorations to a building. Instead, the rehabilitation of the building must be substantial. The substantial rehabilitation tests a 24 month period, which is selected by the owner or lessee, whereby the rehabilitation expenditures must exceed the greater of $5,000 or the adjusted basis of the property, whichever amount is greater. The substantial rehabilitation test does not require all rehabilitation work to be completed within this 24 month period. The 24 month period is simply a window to determine whether the rehabilitation is truly substantial.

Q: Can a lessee take advantage of the Federal Historic Tax Credit?

A lessee may claim the credit if the lessee has incurred costs to substantially rehabilitate the historic building. However, there is an additional requirement regarding the term of the lease. If a lessee wishes to claim the credit, the lease term must exceed 39 years for nonresidential real property and exceed 27.5 years for residential rental real property.

The Federal Historic Tax Credit has been one of the most successful programs to revitalize communities, increase property values, and save historic buildings that may otherwise be destroyed.  Notably, recent legislation has been introduced to increase the Federal Historic Tax Credit from 20% to 30%.

The November 17th edition of “The Law” will discuss social media and the law.

REEP Credit

By: Justin P. Callaham, LL.M.
Clark, Campbell, Lancaster & Munson, P.A.

Q: Planning ahead for my 2016 taxes, can I get tax credits or deductions for installing energy efficient products in my home?

A: Yes, at least two federal tax credits are available for such installations during 2016. The federal Protecting Americans from Tax Hikes Act of 2015 extended the Residential Energy Efficient Property (“REEP”) credit through 2021. The REEP credit is equal to 30% of all qualified solar electric and solar water heating property expenditures made during the year. Solar electric expenditures are incurred purchasing or installing devices using solar power to generate household electricity. Solar water heating expenditures require that the device heats water used in your home and derives at least half of its energy from the sun. For example, if during 2016 you pay $6,000 to purchase and install solar panels at your home and an additional $4,000 for a pool heater deriving at least half of its energy from the sun, you would be entitled to a $3,000 (or 30% of the $10,000 total expense) REEP credit against your 2016 federal income taxes. To receive the full benefit of the REEP credit program, you must make the qualified expenditures before the end of 2019, as the applicable credit will be reduced to 26% in 2020 and 22% in 2021.

In addition to the REEP credit, Congress also extended the non-business energy property credit. Under that program, you will receive a credit equal to 10% of all amounts paid for qualified energy efficient improvements, which can include insulation, exterior windows, skylights, exterior doors, and certain roofs. To qualify, the improvements must meet or exceed Version 6.0 of the Energy Star program requirements set by the Environmental Protection Agency. Generally, a product’s packaging will list their Energy Star rating. This credit is nonrefundable and cannot exceed $500 during all taxable periods, and no more than $200 of the credit may be attributable to windows. This credit was retroactively extended, meaning that you also receive a credit for qualifying expenditures made during 2015.

The January 28th edition of “The Law” will discuss so-called “emotional support animals”.

 Justin Callaham is an attorney with the Lakeland law firm Clark, Campbell, Lancaster & Munson, P.A. Questions can be submitted online to thelaw@clarkcampbell-law.com.

 

Federal Tax Liens

By: Anthony A. Velardi
Clark, Campbell, Lancaster & Munson, P.A.

Q: The IRS has filed a tax lien against me, and I would like to sell my home. What should I do?

A: If a person does not pay his taxes, the IRS will usually record a Notice of Federal Tax Lien in the public records of the county in which the taxpayer resides. The Notice creates a lien against any property owned by the taxpayer in that county. The Notice is valid for 10 years and 30 days after the tax is assessed unless the IRS re-records the lien in the public records or the statutory period for collection has been extended. After that period expires, the federal tax lien is “self-released.”

While the lien is in effect, the taxpayer has a few options to address the Notice of Federal Tax Lien. The first option would be to pay off the taxes owed and receive a Certificate of Release of Federal Tax Lien.

The second option would be to request from the IRS provide a “property-specific” release by a Certificate of Discharge of Property from Federal Tax Lien. This option is feasible in a short sale in which the seller will take no net proceeds at closing. But if the taxpayer takes title to the property after the Certificate of Discharge of Property from Federal Tax Lien is issued, the Certificate becomes void. This prevents the taxpayer from fraudulently obtaining a discharge, typically by conveying the taxpayer’s home to a friendly third party and then having the third party convey the property back to the taxpayer free from the federal tax lien.

The IRS may also withdraw the Notice of Federal Tax Lien based upon various grounds such as if the filing of the Notice was premature or otherwise not in accordance with administrative procedures, or if the IRS and the taxpayer enter into an installment payment plan.

Unlike most debts, a federal tax lien can be enforced against homestead property, and a federal tax lien against one spouse can be enforced against that spouse’s interest in the property both during and after that spouse’s lifetime.

If you are confronted with a federal tax lien and would like to sell your home, it may be wise to consult with an attorney to help you navigate through the issues to ensure your interests are protected and your closing goes smoothly.

The January 14th edition of “The Law” will focus on planning ahead for your 2016 taxes.

Anthony Velardi is real estate attorney with the law firm Clark, Campbell, Lancaster & Munson, P.A. Anthony graduated from the University of Notre Dame in 2006 and Stetson University College of Law in 2009. Questions can be submitted online to thelaw@clarkcampbell-law.com.

Making Sure Your Donations Are Deductible

By: Clark, Campbell, Lancaster & Munson, P.A.

Q: During the Christmas season I donate money and toys to various organizations. Are these donations tax deductible?

A: Yes, in certain situations charitable donations are tax deductible; however, the situations in which an individual taxpayer may claim a deduction for such donations are relatively limited. As an initial matter, a charitable donation is the donation of money or property to an organization without the actual or anticipated receipt of a benefit. If a donation entitles an individual to merchandise, goods, or services, including admission to a charity ball, theatrical performance, or sporting event, the charitable donation is only that portion of the donation that exceeds the fair market value of the benefit received.

Charitable donations are tax deductible only if the individual taxpayer itemizes his or her deductions and only if the charitable donations were made to an organization that qualifies under Section 170(c) of the Internal Revenue Code. The IRS maintains a searchable database of qualifying organizations that may be accessed at http://apps.irs.gov/app/eos/. Furthermore, the amount of the tax deduction an individual taxpayer may claim for charitable donations in a given year is capped at fifty percent (50%) of the individual’s adjusted gross income. This cap is lowered to thirty percent (30%) of an individual’s adjusted gross income for charitable donations to certain private foundations, veterans’ organizations, fraternal societies, and cemetery organizations.

Finally, most charitable donations must be substantiated. Donations of household items, such as toys, clothes, furniture, and appliances, worth $250.00 or more must be substantiated by a written acknowledgement from the charity receiving the donation. Such acknowledgement must include the name of the charity receiving the donation, the date of the donation, and a reasonably-detailed description of the items donated. Donations of money, regardless of the method of payment or amount, must be substantiated by a bank record or a written acknowledgement from the charity receiving the donation. Cancelled checks and bank, credit union, or credit card statements are generally sufficient to substantiate a donation of money. Due to these substantiation requirements, you should ensure that you obtain a written acknowledgement when you donate cash or significant amounts of property.

The January 1st edition of “The Law” will discuss gift certificates, credit memos and refunds. Questions may be submitted online to thelaw@clarkcampbell-law.com.

Greening May Not Cost You So Much Green

By Justin Callaham, LL.M., Attorney 
Clark, Campbell, Lancaster & Munson P.A.

Q: Greening has decimated my small orange grove. How can I remove the trees but still retain the grove’s agricultural designation for property tax purposes?

A: Yes, you may be able to remove the trees and retain the land’s agricultural designation.

Greening, also known as huanglongbing or HLB, is a bacterial disease spread by flying insects known as psyllids. When HLB infects a grove, many growers scale back their maintenance regimen and all but abandon the infected grove. Removal of the trees, however, is the best way to prevent an infected, unproductive grove from becoming a breeding ground for psyllids and HLB. Many growers hesitate to push the grove due to the possible loss of the land’s agricultural designation for property tax purposes.

In recognition of this problem, the Florida legislature adopted § 193.461(7)(a) which allows land to retain its agricultural designation for property tax purposes if the land was taken out of agricultural production by a state or federal eradication or quarantine program. Additionally, the Citrus Health Response Program, an initiative developed by the Florida Department of Agriculture and Consumer Services, declares that much of the State of Florida is quarantined due to the presence of HLB. Taken together, §193.461(7)(a) and the Citrus Health Response Program allow growers to remove trees from an infected and unproductive grove while retaining the land’s agricultural designation.

If your grove is infected with HLB and you are interested in completely removing the trees, start by contacting your local Citrus Health Response Program office and requesting a Site Report. Next, execute a CHRP Abandoned Grove Compliance Agreement. Once you receive the Site Report, submit the Site Report and an executed CHRP Abandoned Grove Compliance Agreement to your local property appraiser before the March 1 statutory deadline. If your grove is currently designated as agricultural for property tax purposes, you will not be required to file a new application. However, if your grove is not currently designated as agricultural for property tax purposes, submit an application for such designation along with the Site Report and CHRP Abandoned Grove Compliance Agreement.

The October 9th edition of “The Law” will address the sometimes confusing process of the appointment and election of judges. Questions may be submitted online to thelaw@clarkcampbell-law.com.