Florida's Tax Haven Might Get Even Better

Florida's lack of an individual state income tax has always been a strong selling point for attracting new residents.  Tax reform may make that point even stronger.

New York, New Jersey, Minnesota and Connecticut have taxed their residents with state income tax rates ranging from 6.99% to 9.85%.  That hit was softened a bit because these residents could deduct their state and local taxes when calculating what they owe the federal government.

Now, however, the proposed new tax reform law, in addition to dramatically lowering federal income tax rates, eliminates the state and local tax deduction.  This means that the residents of the above states and over 35 other states, will be paying the same federal taxes than those of the few states such as Texas and Florida that do not have individual state income taxes.  Plus, they will continue to pay their state income taxes.

Who will this affect?  It is estimated that almost half the taxpayers in Maryland and New Jersey and one-third of New Yorkers take these deductions.  New York residents who itemize deduct and average of $21,000 for state and local taxes.  Without the deduction, they will pay the same federal tax as Floridians, as well as their state and local tax (which Florida residents do not pay).

A 2016 report from the Tax Foundation give the state and local tax rates for these states:  

Connecticut (6.99%),  Wisconsin (7.65%),  New York (8.82%),  New Jersey (8.97%), Minnesota (9.85%).

Your Dream Vacation Home May Become Your Family's Probate Nightmare

One of the advantages of living the Snowbird life is having a vacation home in Florida as well as your other home "Up North."  However, without proper planning this arrangement could lead to increased costs and delays for your loved ones when the properties pass through your estate.

When a person dies, if probate is needed, it is opened in the state in which he was a resident.  The probate court in that state generally has jurisdiction over all real estate located in that state and all personal property located anywhere.  Any real estate owned in another state is subject to the laws of that other state, including probate laws.

So if you are a New Jersey resident owning a second home in Florida, your estate will have to be probated in both New Jersey and Florida.  The initial probate proceedings will be opened in your state of residence, New Jersey, and later moved to Florida to deal with the Florida home.  This Florida probate proceeding is called "ancillary administration."  In most cases, ancillary administration means double the costs, double the aggravation, and double the time necessary to get through probate.  It also means that the administration of the Florida estate is subject to Florida probate law.  Your Will now has to comply with Florida requirements.  The executor (or personal representative) that you named in your Will has to qualify under Florida law.  Florida creditors have to be dealt with, a Florida attorney must be retained and Florida filing fees and court costs have to be paid.

How can this be avoided?  You need to make sure that the Florida property can pass to your heirs without going through probate.  One way to do this is through joint ownership with right of survivorship. However, this arrangement can cause other unanticipated problems. Some of those problems are discussed here.  

Another possible solution is to use an Enhanced Life Estate Deed for the Florida property.  This has a similar effect as putting a beneficiary on your property.

Finally, you should consider setting up a revocable trust.  This is a powerful and flexible way to pass on your estate without probate.  Both your New Jersey and Florida property can be transferred to the revocable trust, thereby avoiding probate for both properties.

Can You Have 2 Homesteads?

Clients often ask me if they can have two homesteads.  They’ll explain that only one of them has become a Florida resident.  The other is still a resident of Michigan, and Michigan has a Principle Residency exemption for its residents which saves them property taxes on their Michigan home.

First of all, let’s review what is required to qualify for homestead status in Florida.  

(1) You must own the property (or your revocable trust must own it).  You cannot be a tenant or it cannot be owned by a corporation, LLC or certain irrevocable trusts.

(2) You must be a resident of Florida.

(3) It must be your primary residence.  This means you, your spouse, or family members who you are legally obligated to support must reside in the home.

And all of these qualifications must be existing on January 1 of every year you are seeking to claim the exemption.  Therefore, activities such as renting out your home, not changing your drivers license or car registration or voting registration to Florida can jeopardize your homestead status.

Likewise, if you maintain an out-of-state-residency-based tax exemption, reduction, benefit or credit on another property you own, you also jeopardize your homestead status in Florida.  So, in the example at the beginning of this article, the answer is NO, you cannot have two homesteads, except in a very limited scenario.   

A Pasco County case did provide a circumstance where a husband and wife can each claim Florida homestead.  The Court ruled that where the husband and wife have established two separate permanent residences in good faith and have no financial connection with and do not provide benefits, income, or support to each other, each may be granted a homestead exemption if they otherwise qualify.  This means that the husband and wife have separate and distinct households, similar to a marriage separation.

The Court made it clear that the burden of proving this exception would be on the taxpayers.

Florida law also has some severe penalties for those improperly claiming a homestead exemption.  A tax lien will be placed against the homestead property.  The homeowners will be liable to pay back all of the tax savings they realized during the previous years that the homestead was wrongly claimed, up to ten years.  This includes the tax savings due to the $25,000 and $50,000 taxable value reduction as well as the savings resulting from the 3% cap granted by the Save Our Homes amendment.  They also will be required to pay a penalty of 50% of the unpaid taxes for each year.  And all of this accrues interest at a rate of 15% per year.

The takeaway of this article.  Be careful in claiming your Florida homestead exemption.  If you are unsure, consult a Florida attorney experienced in such matters.