Tax Question II, the Search for More Money

If you get the movie reference in the title, bonus Internet points for you. Don’t use them all in one place.

So it seems like I have an answer to my tax problem from Monday. (I am posting this so I won’t lose my train of thought before I talk to the attorney on Thursday.) I would rather set a stack of $100 bills on fire than pay it to the IRS so crooked bastards in politics can use it to make themselves rich, so any way that I can avoid paying taxes that won’t see me land in Club Fed is a good idea, in my book.

The TL:DR version is that I need to sell the old house to an S corporation that my wife and I own. To do this, there are a few things that need to happen:

• Form a Florida corporation. No sweat.
• Within 2 months of forming, file an IRS form 2553 (pdf alert)
• Get the old house appraised
• Have the newly formed S corp buy the old home for the appraised value (since the sale was not an “arms length” sale, the appraisal proves it was being sold for fair market value)

This allows me to do two things: take the capitol gains deduction for the difference between the original purchase price and the appraised value that the S corp bought it for, and resets the cost basis for the property. This second part is nearly as important. The reason for that is called “Save Our Homes.” To understand Save our Homes, we have to first understand how Florida calculates property taxes.

Ad Valorem

In Florida, the county property appraiser is an elected position that estimates what your house is worth each year, called your “market value.” If your house is your primary residence, you can take a deduction called the “homestead exemption” of $50,000 from that market value. The result is called your “assessed value.” Each July, the property appraiser mails out the proposed value of each property to the property owner. If you don’t think that the value is fair, you have 30 days to appeal that valuation. Most people want it to be as low as possible, because that is the value that your taxes are based on.

The tax collector (also an elected position) charges a “millage rate” as an “ad valorem” property tax. Each “mill” is 0.1% of your home’s assessed value.

It seems complicated, but it really isn’t. For example, let’s say that your house has been deemed by the property appraiser’s office to have a fair market value of $100,000, and your county charges a property tax rate of ten mills. You would take the $100,000 market value and subtract your homestead exemption to arrive at an assessed value of $50,000. The tax of ten mills on that would make your property taxes to be $500 for the year. Clear so far? Good. It gets a bit more complicated.

Save Our Homes

Back in 1995, the voters of Florida passed an Amendment to the state Constitution that limits the annual increase in the assessed value of your homestead to the lesser of 3% or the consumer price index. Since real estate increases more than that in value each year, the longer you own your home, the better. The gap between the market value and the assessed value is called your “Save Our Homes” credit.

In most cases, you want the property appraiser to set your assessed value as low as possible. The only reason you don’t, is if you are about to move to a more expensive home. The reason is called portability. If you are moving from an old house to a new one, you can take your Save Our Homes credit with you. That can mean a significant tax savings.

So how will that help me?

As an example, let’s say that I paid $200,00 for a house, and 10 years later the tax assessor says it has a market value of $300,000. The Save Our Homes credit would be $31,000. If I buy a new house worth $400,000, that house would be assessed at $31,000 less. If the millage rate was ten, this would save me $310 a year in taxes. But what if I could get the tax assessor to admit that my house actually had a market value of $350,000? That would make my Save Our Homes credit $81,000 instead, and this would save me an additional $500 a year in property taxes at my new house.

It would seem to be a wash, since I am keeping the old house as a rental, but remember that the old house’s taxes are deductible as a business expense, and if the millage rate is higher for the new house’s location (which it is), the savings are even larger.