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January 4, 2012

In defense of the homestead credit

A reader named Erich wrote in the other day to defend the Homestead Property Tax Credit, which acts as a cap on spiraling property-tax bills for homeowners but as a side effect leaves neighbors in similar homes with very different bills to pay.

A former Baltimore resident, Erich bought in Pasadena in 2007 and homes values have only fallen since. So he says he isn't a big homestead recipient -- he isn't getting a break from the credit at all. But he likes the idea that his bill will be capped if assessed values ever do go up beyond Anne Arundel County's 2 percent-a-year limit.

Here's what he wrote:

I completely disagree with the argument that there is something wrong with the Homestead credit simply because two neighbors with similar houses pay extremely different tax amounts. So what? When you purchase a house your taxes are listed on the settlement statement, it's not something the state/city surprises you with. The Homestead credit is there to protect homeowners from drastic changes in their tax bills based on the revolving property tax assessments that happen every 3 years. ... So owners that buy at a certain time and lock in the credit should be able to get that smooth curve in their tax bills. ...

In the 'robbing peter to pay paul' example, it's not transferring tax burden from one house to another because the newer neighbor also gets the tax credit, it just happens to be on a higher assessed value. ... As far as 'double dippers' and landlords getting the credit, go after them, they are breaking the law.

The homestead credit is statewide, but the cap on the amount of increased assessed value you can be taxed on in any given year varies from jurisdiction to jurisdiction. It's 4 percent in Baltimore and Baltimore County, for instance, and 5 percent in Carroll and Harford. Anne Arundel's 2 percent cap is one of the lowest in the state.

I mentioned to Erich that his email sums up one of the arguments made in favor of the homestead program as it is now -- that everyone qualifies for the cap in property-tax increases on their principal residence. (The other main argument is that the cap helps tamp down on the problem of homeowners with spiraling values being taxed out of town.)

But what about the consistent opinion the Maryland attorney general's office has taken on the program -- that it violates the state's constitution because it doesn't allow "uniform" taxation among homeowners?

"Actually, I believe there is a huge argument that it meets 'uniform' taxation: the rate is the same for the entire jurisdiction," Erich responded. "The same way that income tax is the same for two people making the same salary, and for one reason or another, one of them has more deductions then the other, the realized rate will be different."

He added, "I have some of the highest taxes in my community. But I bought in 2007 whereas many of my neighbors have been there since the 70's and 80's, so when the market dropped I was proactive about getting my house reassessed and my bill dropped while many of [theirs] kept going up (slowly). So I think the credit works exactly the way it should."

What are your feelings on the homestead credit? Good as is, in need of tweaks or due for an overhaul of some sort?

Posted by Jamie Smith Hopkins at 6:00 AM | | Comments (7)
Categories: Homestead Property Tax Credit
        

Comments

Actually we WERE surprised by our tax bill. We were hit with an out-of-cycle reassessment that significantly raised our tax rate, but the homestead credit didn't apply at that time. This has since been (mostly) remedied, thanks to the option to reapply for the credit about 2 years ago, but it still means that the state CAN surprise you. We're still paying a LOT more than our neighbor who bought after us, paid more, and wasn't out-of-cycle reassessed.

Summer, was your home substantially renovated (shortly before or after you purchased)? The effect that can have on your assessment definitely catches some folks by surprise: http://weblogs.baltimoresun.com/business/realestate/blog/2010/12/dont_get_surprised_by_this_propertytax_rule.html

I'm curious whether your neighbor's home was also renovated but assessors didn't realize it, something that does happen.

Our house was renovated before we bought. His was too. By the same company. His house was more luxuriously renovated, higher end finishes, etc. His price was higher than ours, and his assessment is now higher than ours, but because of the homestead credit timing, he pays significantly less than we do.

That's very frustrating -- I'm sorry to hear it.

Technically it's not the Homestead credits fault, the neighbor just got lucky with the timing of their assessment and when the credit kicked in for them. You can't be upset at the credit, it's doing it's job of softening the higher assessment for them. I would be upset with the state and their out of cycle assessment of your property.

The state is supposed to do out-of-cycle reassessments when a property is substantially renovated, and the homestead credit isn't supposed to shield owners from paying on the new value.

So what seems to have happened here is that the neighbor was missed, giving him an artificially low tax bill. We've found other examples of that among homes rehabbed during the boom years.

Not being from the Baltimore area, but dealing with a myriad of property ownership situations, it drives me crazy to see a disparity in tax burden from home to home. After all, it is supposed to have been the "American Dream" to own one's own home and property. It would only make sense to see more incentives to be enacted, especially in these difficult economic times, to help those who want to make a purchase, an easier endeavor to undertake.

In Florida, we had a similar situation, but only because we purchased our property at the height of the market. People who pay more for a property, have the unintended privilege of getting to pay higher property taxes. So for those who buy in Florida now, would pay far less than we did, even if they live next door. This is not only unfair, but it creates a potential burden for the government in near future. Of course if property taxes are low because of home prices being low, taxes are going to have to be raised elsewhere.

In New York City where we live and work, we also have a similar situation regarding what is known as the mansion tax. The common belief is that the mansion tax kicks in at $1M, however the exact number is actually $976K. What this means is, the person who owns an apartment and paid $976k has to pay a one time only tax payout, for the privilege of owning what was once considered to be a luxury home. This law has been on the books for decades, but with the rising prices for apartments, one would not have to purchase a "mansion" to be hit with the tax. But my point is that it is grossly unfair to tax someone just because they were unlucky enough to not be exactly sure of the number where the cutoff is for one to have to pay the tax, but you can imagine what this means when someone is living next door to someone who paid $975K for what is essentially, the same exact property.

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About Jamie Smith Hopkins
Jamie Smith Hopkins, a Baltimore Sun reporter since 1999, writes about the regional economy. Her reporting on the housing market has won national and local awards. Hopkins is a Columbia native and has lived in Maryland all her life, save for 10 months spent covering schools in Ames, Iowa.
She trained to become a wonk by spending large chunks of time as a geek and an insufferable know-it-all.
Baltimore Sun articles by Jamie
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