Many homeowners seeking to make extra cash by renting all or part of their home through such online home-sharing portals as AirBnB or Craigslist are discovering that the homestead exemption they’ve been claiming on their taxes for years is no longer valid once they start renting out their homes
Likewise, state and county governments all over the country are cracking down on illegitimate homestead exemptions in order to recover lost revenue, in some cases reclaiming millions of dollars in unpaid back-taxes and penalties.
In 2016, the state of Florida recovered $550 million by targeting homestead-exemption fraud. Last year, property appraisers in Florida’s Duval County alone identified 1,900 homeowners who were in violation of the law, netting the county $11 million in recovered funds. And in Louisiana, lawmakers have boosted the penalty for homestead-exemption fraud from a slap on the wrist to a $5,000 fine, restitution, and up to six months in prison.
Ignorance or Fraud?
Homestead exemptions are designed to give homeowners a tax break on their primary residence. In Florida, for example, all primary homeowners are eligible for a $50,000 deduction — $25,000 of which also applies to school taxes. So, if a home is valued at $200,000, the homeowner is taxed as if the property is valued at $150,000, and, for the purposes of school taxes, as if it were valued at $175,000. Only one property is eligible for the exemption, however, and it must be the homeowner’s primary residence.
Where many AirBnB hosts run afoul of the law, often unintentionally, is when they rent their home for more than 30 days per year — which, in Florida, disqualifies their exemption claim. In other states, renting a room out for as little as 15 days a year can be cause for disqualification. There are plenty of other ways to violate the law as well: by claiming exemptions for more than one property; or by claiming exemption for multiple properties in different states; or by claiming an exemption for someone who is dead.
According to Duval County property appraiser Jerry Holland, most homestead-exemption violations are unintentional, and can’t be properly called fraud. “Most people don’t know they’ve broken the law until we tell them,” says Holland, and then, most do the responsible thing and pay up. But about 20% of the cases in Duval County do involve deliberate, intentional fraud, Holland estimates, and AirBnB properties are definitely among them.
“We had one guy where we said, ‘Hey, it looks like you’re renting out your place as an AirBnB,’” Holland recalls. “He said he wasn’t. And we said that’s strange, because on the AirBnB site, there are 20 reviews saying what a great host you are.”
AirBnB hosts who claim exemptions on more than one property are not uncommon, either, says Holland, but prosecutions are rare because, he adds. “Most people just claim ignorance.”
Not Worth the Risk
In many places, abusing homestead-exemption laws has historically been viewed as a relatively low-risk form of fraud. But recent advances in data analytics and software have made it much easier for property appraisers to cross-reference tax records and flag suspicious properties. Governments starved for revenue are also creating special task forces to go after homestead fraudsters and encouraging citizens to go online to report suspicious activity in their neighborhoods.
These factors — coupled with the trend all over America of people who are suddenly trying to generate extra income as AirBnB hosts — has created a plethora of homeowners who, wittingly or not, are either skirting or violating their state’s homestead-exemption laws.
Every state’s homestead-exemption laws are different, and some states — such as New Jersey, Pennsylvania, and Maryland — prefer to offer eligible residents a credit on their property tax rather than a valuation reduction. But the route to violator status is essentially the same everywhere: claiming an exemption for a property that isn’t exclusively being used by the homeowner as their primary residence.
Many people are attracted to AirBnB as a way to make extra money off a property they already own, but they remain unaware — or unconcerned — about the possible tax implications of their enterprise. Some jurisdictions, such as Florida’s Miami-Dade County, have also begun collecting a hotel or “resort” tax on AirBnB operators in order to level the playing field with local hotels and resorts.
Either way, those who wish to participate in the home-sharing economy should educate themselves on the local tax implications before setting up shop. Otherwise, they risk having to pay back-taxes and penalties — or worse, spend time in front of a judge.
Click here for more information on better detection methods to help prevent tax fraud.
