Most Floridians are aware of the state’s homestead exemption, but there are important aspects of the Florida homestead exemption the average person may not know.
The law consists of three separate sets of rules: the “save our home” rule, which limits how much the homestead’s value can increase each year for purposes of calculating the property tax; rules to protect the homestead from seizure by creditors; and devise of the homestead, or who gets the homestead at the death of the owner.
Save Our Home
The save our home rule stipulates that the homestead’s value can’t increase by more than 3% per year, or the rate of inflation if less than 3%. To obtain this exemption, the homestead’s owner must apply for it at the property appraiser’s office for the county where the homestead is located. The limit only applies to the increases in the value of the homestead, not to the tax rate imposed on the value.
If the homestead is sold and a new one is purchased, the property value increase that isn’t taxed due to the 3% cap can be carried over to the new home. The appreciation that isn’t taxed due to the 3% cap won’t be lost on sale if a new homestead is purchased. These rules can lead to significant savings in property taxes during times when real estate is subject to significant appreciation.
Protection From Seizure
Another aspect of the homestead exemption is that the homestead can’t be seized by creditors. There is no limit on the value of the property for this protection to apply, but there is a limit on the size of the land on which the homestead is located. If the homestead is situated in the city limits of a municipality, it only applies to a home on a lot of up to half an acre.
For example, if the homestead were located on a lot that consisted of one acre, only half of the homestead would be subject to the homestead protection from creditors. If the homestead is outside city limits, then up to 160 acres is protected from creditors. If the homestead is located on a parcel that exceeds the size limits for the protection from creditors to apply, then a creditor can seize the homestead and sell it, but the creditor would only keep the portion of the proceeds from the sale that relates to the portion of the property that exceeds the size limit.
In the above example where the homestead is on one acre of land, a creditor could have the homestead seized and sold, but the creditor would only be allowed to keep half of the proceeds from the sale, and the owner of the homestead would receive the other half of the proceeds. Florida’s public policy of protecting homesteads from creditors is so strong that the Florida Supreme Court has held that a homestead is protected from creditors even if the homestead is purchased by the owner of the homestead for the purpose of defrauding the owner’s creditors.
Creditors have been able to avoid the homestead creditor protection rules in cases where funds used to purchase the homestead are obtained by illicit means. Also, the homestead creditor protection rules can be overridden by federal bankruptcy rules if bankruptcy is filed within a short period after the homestead is purchased.
Devise of Homestead
The devise of the homestead is a lesser-known set of rules and can be a trap for the unwary. If a homestead’s owner has a surviving spouse or minor children, the surviving spouse receives a life estate in the homestead on the death of the owner, and the descendants receive a remainder interest. The surviving spouse also can elect to take an undivided half interest in the homestead, in which case the deceased owner’s descendants will receive the other half interest in the homestead.
These rules can result in two sets or problems. The homestead may not go to the people to whom the deceased owner wishes to leave the homestead. It also can be difficult to administer a homestead in which the surviving spouse has a life estate, and the descendants own the remainder. In the life estate scenario, the surviving spouse cannot sell the home without the permission of the descendants. If the home is sold, the law does not provide how the proceeds from the sale are to be split among the surviving spouse and the descendants.
In such a case, unless both the holder of the life estate and the remaindermen reach an agreement to sell the home and how the proceeds from the sale will be divided, the homestead can’t be sold. This can be even more difficult in the case of a second marriage, where the descendants are not the descendants of the surviving spouse.
In some cases, there can be easy ways to avoid the homestead rules as to devise. If there are no minor children, the spouse can waive their homestead rights, and the owner can leave the homestead to whomever they wish. The waiver must take place before the death of the homestead owner for this to work, and the homestead owner can’t have any minor children at time of death. If the homestead is titled in a revocable trust, the waiver is still necessary to avoid the homestead rules as to devise.
Another way to avoid these rules in the case of a married couple is to title the homestead in the joint names of both spouses, so the homestead will pass to the surviving spouse on the death of the first spouse. However, this method leaves the homestead to the surviving spouse with no flexibility as to the recipient of the homestead.
There are significant advantages provided by the Florida homestead rules, but there can also be traps we may want to avoid. To take advantage of the favorable rules and avoid the disadvantageous ones, we need to be aware and plan accordingly.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Eugene Pollingue is a partner in Saul Ewing Arnstein & Lehr’s West Palm Beach Office. His practice is concentrated in the area of estate planning and asset protection for high net worth clients, probate, and income tax planning for commercial transactions.
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