Property Tax Post: Homestead Tax Exemption Fraud is on the Rise, but Lawmakers Are Cracking Down

Do you know the property tax homestead exemption amount in your state? As a progressive approach to property tax relief, homestead exemptions are a significant benefit to homeownership, but like most fundamentally good things, the homestead exemption is subject to abuse. Lawmakers in states like Florida and Louisiana are actively fighting against property tax fraud and recovering millions.

To receive a homestead exemption, a state resident must live in the home where the exemption is claimed and cannot receive a residency-based exemption in another state. Homestead exemptions are either flat dollar or percentage exemptions. The Institute on Taxation and Economic Policy explains that flat-dollar exemptions usually benefit low-income homeowners as they exempt “a specified dollar amount from the value of a home before a tax rate is applied,” where “percentage exemptions provide the same percentage tax cut to homeowners at all income levels.”

A major consideration for states offering a homestead exemption is which level of government will bear the cost.  The Institute notes that “state lawmakers creating a homestead exemption must decide whether to provide state funding to reimburse local governments for the cost of the exemption, or whether to force local governments to shoulder the cost.” Some states offer unlimited homestead protection up to the full value of the home, while other states set a maximum percentage for the exemptions. Maryland, New Jersey, and Pennsylvania offer no homestead exemption, but instead some type of credit or other benefit.

Homestead Exemption Fraud

Homestead exemption fraud can happen a number of ways and can cost some states millions in revenue. On June 1, PRNewswire reported that Florida property tax officials recovered over $550 million from property tax fraud this year. In that instance, property owners unlawfully applied for and received Florida’s homestead property tax exemption. Taxpayers who are wrongfully claiming the exemption are causing a big problem because it’s difficult to prove that the person did so intentionally.  

Common examples of ways that taxpayers cheat the system include:

  • fraudulently converting nonexempt or illegal assets to buy a home and then claiming a homestead exemption;
  • claiming dual homestead exemptions (meaning the taxpayer submits claims for properties in more than one state); 
  • claiming homestead exemptions on rental property; or 
  • falsely claiming the exemption for a person who is deceased.

Often, the penalty for fraud is to reduce the exemption by the amount of the fraud, plus penalties. Louisiana is taking a major step in cracking down on fraudulent taxpayers. Lawmakers recently passed H.B. 546, effective on Aug. 1, which makes homestead exemption fraud a crime and provides for criminal penalties and restitution. This bill allows any person who intentionally claims more than one homestead to be fined up to $5,000, and the offender may be subject to up to six months in jail. 

The federal government also has certain restrictions in place to prevent taxpayers from using the homestead exemption to defraud creditors that the taxpayer could not discharge in bankruptcy. Pursuant to 11 U.S.C. § 522, the value of any interest in real property claimed by a taxpayer as a homestead is reduced to the extent that any of the value was attributed to the disposal of assets. This includes to any portion of any property that the debtor disposed of in the 10 years prior to filing the bankruptcy petition. The law also provides a $125,000 cap for homesteads bought within 1,215 days of a bankruptcy filing and a $125,000 cap for any taxpayer convicted of violating securities laws.

Many state revenue departments dedicate a significant portion of their websites to property tax fraud prevention and provide hotlines for individuals to report suspected activity. Homestead tax exemption fraud affects every taxpayer, and it seems that law makers have decided the only way to crack down is to enforce heavy penalties against tax cheats who claim improper homestead tax exemptions.

Continue the discussion on LinkedIn: Should all states impose criminal sanctions against people who falsely claim homestead tax exemptions? Do you think it will decrease the number of false claims?

For more information about state tax issues, sign up for a  free trial on Bloomberg BNA’s Premier State Tax Library.

By Cynthia N. Wells