Shhhh…Underground Advice: How to Claim the Homestead Exemption as a Landlord

Posted on: November 20, 2010

Categories: Property Management, Things To Consider

Author: buyfixandprofit

The following is not warranted as legal, tax, or appropriate advice, but it does happen.

Landlord Reduces Property Taxes

The homestead exemption is a tax exemption given to a resident’s primary home that reduces the assessed value for tax calculation purposes and thus reduces the property taxes paid.  Most states have a homestead exemption but not many people realize that in many counties it is also available to tenants, or occupants of a home subject to a lease.

This tactic can yield significant savings for those in high tax areas with SFH rentals.

Here’s the arrangement worked out by one landlord and his tenants.  This landlord was describing to me how outraged he was at the increase in property taxes on all his rental properties, all of which are single-family homes.  The landlord was planning on raising the rents on his properties in order to offset his additional costs, until he discovered that his county allows for tenants to claim the homestead exemption.  The homestead exemption reduces the assessed value of a property, which in turn lowers the property taxes.  So instead of raising the tenant’s rents, he worked with them to have them claim the homestead exemption, which in turn would maintain his cash flows.

Here is a sample of one county’s eligibility requirements, which I have found to be similar for many other counties.  (check your local requirements before attempting)

Eligibility requirements for the general homestead exemption via a leasehold interest:

  • The property must be a single-family home occupied as the primary residence by an eligible taxpayer as of January 1 of the current year
  • The eligible taxpayer must be liable for paying the current year’s real estate taxes on the property as evidenced by a written lease that was executed and effective on or before January 1 of the current year; a copy of the lease must be provided.
  • The property owner must direct the property tax bill to be mailed directly to the lessee.
  • The eligible taxpayer’s lease must require that the lessee pay the real estate taxes out of the lessee’s own funds; a statement such as “Tenant shall be deemed to be satisfying tenant’s liability for such real estate taxes through the monthly rent payments” is NOT sufficient for this purpose.
  • Due to the periodic nature of leaseholds, a notarized application for this exemption must be submitted each year.
  • Qualified taxpayers are permitted an exemption that will remove up to

$6,000 (value will vary) from the equalized assessed value before taxes are calculated.

Landlord Implementation

The tenants were given two choices.  Either pay an increased rent or work with the landlord on lowering the home’s property taxes.  After updating the leases to reflect that the tenant would now be paying the property taxes directly, an escrow account was set-up to hold the portion of the rent slotted for the property taxes.  So from every rent check an equal amount was removed and held in escrow until the tax bill came due again.  At that time, certified checks were used to pay the property taxes with the tenant’s name as the remitter.  No questions asked and everyone gets what they want.

The tenants’ rents didn’t have to go up and the landlord’s property taxes actually came down.

Tax Implications for the Landlord

Can the landlord claim the property tax deduction when filing his tax returns if the tenant was responsible for directly paying the taxes on the property?  Most likely not, but most tenants wont be itemizing their deductions and therefore won’t be able to realize the full benefit of the property tax deduction anyway.  Therefore, as long as only one person is claiming the deduction and not both, there is no lost revenue to the county.   This isn’t professional tax advice, but it works for some.

Once again, this is just food for thought gathered through discussions with other landlords.

I would love to hear your comments on this topic.

pixel Shhhh…Underground Advice: How to Claim the Homestead Exemption as a Landlord

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