Buying a home is a monumental step, but it’s essential to be aware of all potential costs involved. One often overlooked expense is property taxes, which can significantly impact your monthly mortgage payments. A common and costly surprise occurs when purchasing a home from a seller who has resided in the home for a long time, benefiting from a homestead exemption. Here’s what you need to know to avoid unexpected financial stress.

The Homestead Exemption Impact

In Florida, the homestead exemption provides significant property tax savings for homeowners on their primary residence. This exemption can reduce the taxable value of the property by up to $50,000, resulting in lower annual property taxes. Additionally, the Save Our Homes (SOH) cap limits the annual increase in assessed value to 3% or the rate of inflation, whichever is lower.

While this is great for the seller, it can lead to a significant tax hike for the new buyer. Here’s why:

1. Existing Tax Rate - The seller’s property taxes are based on the lower, capped value due to the homestead exemption and the SOH cap.

2. Reassessment - When the property is sold, it is reassessed at its current market value, which can be substantially higher than the capped value.

The Financial Surprise

As a lender, we approve the incoming buyer based on the existing homeowner’s tax rate. This can lead to a massive discrepancy between the seller’s low taxes and the buyer’s new, higher taxes. Here’s what typically happens:

1. Escrow Shortage: After the reassessment, the property taxes increase significantly. The annual escrow review reveals a shortage because the initial escrow payments were based on the seller’s lower tax rate.

2. Higher Payments: The buyer not only has to cover the new, higher tax amount but also needs to replenish the escrow shortage. This leads to an additional increase in their monthly escrow payments.

Setting Proper Expectations

To avoid being caught off guard by these unexpected costs, it’s crucial to set proper expectations from the start. Here’s how:

1. Understand the Seller’s Tax Situation - Ask how long the seller has lived in the home and whether they have a homestead exemption. This can give you an idea of how much the current taxes are reduced.

2. Estimate New Taxes - Work with your lender to estimate what the property taxes will be after reassessment. This will give you a more accurate picture of your future payments.

3. Budget for Increases - Include potential tax increases in your home-buying budget. Be prepared for higher payments in your first year of ownership.

4. Review Escrow Statements - Keep an eye on your annual escrow statements and be prepared for adjustments. If you know a reassessment is coming, plan for the possibility of an escrow shortage.

Conclusion

Understanding the potential impact of property tax reassessments is crucial when buying a home, especially from a long-term owner with a homestead exemption. By doing your homework and setting realistic expectations, you can avoid the financial shock of increased tax payments and escrow shortages.

At the Financing Homeownership Blog, we’re committed to helping you navigate the complexities of homeownership. If you have any questions or need personalized advice on managing property taxes, feel free to reach out. Let’s make your home-buying journey as smooth and stress-free as possible.

I made a video in 2023 explaining this concept. Click HERE to view it on Facebook.

Todd Hanley, RICP®, CMA™