The Unbearable Wrongness of Property Taxes in Miami and Coral Gables

posted on January 25th, 2010 filed under: Real Estate News

If you ever see property-tax information on a listing sheet for a home for sale in Miami or Coral Gables (or anywhere in Florida), do not rely on that information.

You can buy a house in Miami or Coral Gables and pay three times the property taxes of the previous owner, or of a next-door neighbor in a similar home.  This can be a major turn-off for prospective buyers.  Who wants to pay someone else’s taxes?  How did we arrive at this place?  It’s a problem nearly two decades in the making . . . .

Most states have an “ad valorem” property tax system.  Ad valorem means according to value.  Roughly speaking, a local government like Miami or Coral Gables comes up with a budget (how much money they need) and subtracts the amount it’s likely to get from sales taxes and other assorted fees, arriving at the amount that needs to be raised from property taxes.  Each parcel of property is assigned an appraised value, and property owners shoulder a pro rate share of the needed tax revenue according to the relative values of their Miami or Coral Gables properties.

Florida had a genuine ad valorem system until 1992, when voters approved Amendment 10 to the state constitution.  Also known as the Save Our Homes Amendment, it limited annual increases in assessed value to the lower of 3% or the annual change in the consumer price index.

The Save Our Homes benefit protects only so-called Homestead property — i.e., one’s principal residence.  Buyers get no protection, so even if a seller enjoyed a below-market assessment, the buyer will be assessed at market value.  Foreigners are also ineligible for the 3% cap, as are owners of the various kinds of non-Homestead property, such as vacation homes, rental properties, and other commercial properties.

Historically, property values in Miami and Coral Gables have increased more than 3% per year.  Vast inequities were inevitable under the Save Our Homes system, but the real-estate bubble in Miami and Coral Gables accelerated the deepening property-tax disparities.  With prices rising at 10%, 15%, 20%, 25% per year, buyers and other ineligible owners saw their taxes skyrocket while Homestead owners were capped at 3%.  As a result, the government’s books in Miami and Coral Gables have become increasingly disproportionately balanced on the backs of new buyers and other unprotected groups (foreigners, vacation-home owners, rental and other commercial owners).

The severity of the problem has moderated a bit in the last couple of years, as falling prices have led to reduced assessments for buyers.  But that just means the gap has narrowed, not that the gap has been closed.  You can still buy a house in Miami or Coral Gables and pay several times more in property taxes than the seller was paying.  Do not rely on listing sheets for tax information.

A minor effort to ameliorate the inequities of Amendment 10 culminated in the 2008 passage of Amendment 1, which limits increases in the assessed value of non-Homestead properties to 10% per year.  Big deal.  You’d have to be suffering from bubble-vision to think that capping increases at 10% is meaningful.  Only in a bubble, or in times of severe wage and price inflation, could prices rise so fast.  The bubble is over.  Protection against 10%-plus increases is like insurance against damage from meteors.

Indeed, Amendment 1 made matters worse by making existing Homesteaders’ undervaluation “portable.”  Homesteaders became so dependent on their under-taxation that they were effectively prisoners in their own homes.  A Miami or Coral Gables resident who bought a 4-bedroom house in 1995 might be paying a mere $6,000 per year in property taxes.  Moving would almost certainly mean higher taxes — possibly two or three times higher — like for any new buyer.  So in the typical self-dealing fashion that led to Amendment 10 in the first place, Floridians assured themselves the right to move and apply their under-taxation benefit to a new home.  (There’s a formula for figuring out how much of the benefit can be transferred, but that’s a whole other discussion.)

If you are thinking of buying a home in Miami or Coral Gables, do not rely on the current property taxes to figure out what you will pay.

But enough about what not to do.  How can you get a reasonably reliable estimate of what your property taxes will be?  It’s easy.  See the post titled “What Will Your Property Taxes Be If You Buy a Home in Miami or Coral Gables?”

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posted by // This entry was posted on Monday, January 25th, 2010 at 9:28 am and is filed under Real Estate News. You can follow any responses to this entry through the RSS 2.0 feed.

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