Sunday, March 27, 2005

Property owners' taxing problem: They're sitting on a gold mine but they can't get up

Although many residents could make a fortune if they sold their homes, high housing prices and soaring taxes force many to stay put.

By Barbara Marshall

Palm Beach Post Staff Writer

In a housing market this hot, someone was bound to get burned.

Don Todorich is a Lake Worth real estate agent, but despite his knowledge of the market, he's one of many Palm Beach County residents who find themselves suddenly wealthy on paper yet trapped in their homes.
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Todorich estimates he would pocket at least $250,000 if he sold his 3,000-square-foot house in Lake Worth's College Park neighborhood. He paid $125,000 for it five years ago and spent $75,000 on remodeling. His tax bill is $2,950 a year.

He wants a smaller house on the tonier side of the neighborhood, east of Federal Highway. But despite the large potential profit, his dream is still out of reach.

"I'd have to spend $500,000 to $700,000 (for a new home)," he said, "and my taxes would go to at least $12,000."

Todorich, who works for The Pier Group in Lake Worth, says he probably could swing the higher mortgage, but not a tax bill of $1,000 a month.

With homes in Palm Beach County appreciating at record rates, almost all homeowners stand to make a bundle if they sell. Since 2000, the price of the average used home in the county has risen 136 percent, from $149,600 to $352,900, according to figures released last week by the Florida Association of Realtors.

The apparent windfall has led many homeowners to consider selling their houses and moving to better digs. But when they crunch the numbers, some find that even though they would make profits of $100,000 or more on their homes, they can't afford to move.

"We don't see as much moving up," said Jeff Levine of Illustrated Properties in Wellington. "They're (homeowners) doing the math and saying, 'It's not worth it.' "

The biggest hurdle is high prices. For the most part, rapid appreciation has affected homes in all areas of the county, making equity gains an illusion for people who want to move but stay in the area. While they might be able to sell their home for double or triple what they paid for it, they'll likely need all of that profit and more to buy their next home.

A less obvious bar to moving is the huge spike in property taxes faced by many prospective buyers.

"We see people who can make a lot of money on their house and want to upgrade, but with the tax on new purchases, it blows their (financing) ratios out of proportion," said Charles Kohlhepp, manager of the Coldwell Banker office in Wellington.

Annual property taxes on a given home are generally about 2 percent of its assessed value. By law, the assessment can rise no more than 3 percent a year, no matter how much the home's market value goes up. But when a home is sold, the cap is lifted and the house is reassessed at its current value — which often means sticker shock for the new buyer.

In fact, many owners say that because of the leap in property taxes, they can't afford to purchase a home of equal value, much less move up to a more expensive house.

As an example, consider a person who bought a home in 2000 for $150,000. On average, that home now would be worth about $354,000, but because tax assessments on the home have been capped, the owner is paying only slightly more taxes today than when he bought the home. Typical taxes on a $150,000 property are $3,000 a year, or $250 a month.

If the owner sells the house for $354,000 and buys another for the same price, it might seem a wash. But in addition to real estate commissions, lender's and government fees and other costs that could reach into the tens of thousands, he'll also face a dramatic increase in taxes. The new home will be assessed at current market value, making his taxes about $7,080 a year, or $590 a month — an increase of $340 a month for a house worth no more than the one he sold.

Numbers like that squelch the deal for many. Buyers attempting to transfer their equity to a bigger home often find that while they may qualify for a mortgage to cover a new home's purchase price, lenders turn them down when taxes on the new home are figured in. And people downsizing to smaller homes can be in for the biggest shock of all.

Because their taxes will likely leap as well, "they will have to pay more for less," Kohlhepp says.

For some, leaving the area

is the only option

Pinioned by high home prices and huge tax bills, many would-be buyers are staying put — or cashing in their equity and leaving the county.

"It's not an obstacle for people moving out of the area," said agent Lauren Hollander. "They just can't afford to move down the street." Robert and Grace Ruiz and their six kids were among those feeling scorched in one of the country's hottest real estate markets. The family was overflowing their 1,800-square-foot house in Lake Park. Although they made $100,000 when they sold it this year, they couldn't find a bigger house in the area that they could afford.

"Everything we could afford here was what I already had," said Robert, a cable repair technician for BellSouth.

The Ruizes took their equity to Port St. Lucie, where they are waiting to close on a four-bedroom, 3,000 square-foot house they are purchasing for $310,000. Their taxes will be about $6,000 a year.

"You'd have to pay close to $500,000 to get that in Palm Beach County," said their real estate agent, Jody Samanich of Paradise Properties in West Palm Beach. At that price, their taxes would climb to about $10,000.

"I'm (showing properties) in Port St. Lucie at least once a week now," said Samanich, who until last year seldom took clients outside of Palm Beach County.

"Our biggest concern is the average policeman, teacher and fireman who makes $45,000 a year," said Danny Biggs, of Illustrated Properties. "I tell them they have to move out of the county. We're sending everybody north."

Some are going farther north than most. Mark Trudel, owner of a construction services company and a Palm Beach County native, says he has finally been priced out of the area. When his son, Thomas, graduates from Lake Worth High School next spring, the family is moving to North Carolina.

Even though Trudel says his house in suburban West Palm Beach is worth $400,000 more than he paid for it in 1998, he can't make enough on it to buy what he wants and stay here.

Instead, he recently purchased a large, lakefront house on an acre outside Charlotte for $340,000. The same house here would cost at least $800,000, he said, and his taxes would be close to $16,000.

His taxes in North Carolina? About $2,000.

"This bubble has got to burst sometime," Trudel said. "I just hope it's after I leave."

Tax relief in sight?

The high cost of buying a home has sparked at least one call for tax relief. State Rep. Carl Domino, R-Jupiter, has proposed an adjustment to the Save Our Homes amendment, the law that caps assessment increases at 3 percent per year and saves Palm Beach County residents more than $18 billion a year. His plan would give Floridians a tax break when they move, too.

"We need to promote fairness and affordability for many people stuck in their homes," Domino said.

Under his proposal, homeowners would be able to take part of the tax break they're getting on their old home with them when they move. The difference between the taxable value of that house and its sales price would be deducted from the taxable value of the new home.

It would work like this: If a home is valued at $300,000 for tax purposes but sells for $500,000, the difference between the taxable value and the market value is $200,000. That $200,000 could be transferred to a new home as a deduction from the new taxable value. If the homeowner buys another house for $600,000, for example, that deduction would bring the new tax valuation down to $400,000.

Your tax bill could never go down under Domino's proposal, however, even if you downsize. If the homeowner in the example above sold his old house for $500,000 and bought a new one for $400,000, he would get a tax break of only $100,000 — making his tax assessment $300,000, the same as it was on his old home.

Domino introduced the bill last year, only to see it die before reaching the House floor. This year, it has passed one committee in the Senate, and he is waiting to hear whether it will be addressed in the House Finance Committee during this legislative session. If it is approved in committee, it then could be debated on the House floor.

A knee injury laid the tax issue literally on the steps of fellow Rep. Mary Brandenburg, D-West Palm Beach, who supports Domino's bill.

When it became difficult for her to climb the stairs in her 1923 West Palm Beach house, she and her husband, Pete, started looking at smaller, one-story homes in the city's historic neighborhoods. While the prices of $600,000 and up were dismaying enough, the prospect of a $12,000 property tax bill made it impossible for the couple to leave the El Cid house they have lived in since 1974.

"Pete and I figured we can't move because we'd have to pay today's tax rate," she said. "Carl's (Rep. Domino's) bill would support everybody else in my situation and be particularly useful for older people who want to downsize."

Although Domino believes he has support among many real estate agents this year, the Palm Beach County Board of Realtors is not endorsing the proposed legislation, fearing its effect on local government revenues.

"As an association, we have to look at the quality of life issues," said Jennifer Butler, the Realtors Board vice president for government affairs. "If there is a negative impact on municipalities and the county, they won't be able to pay for schools, roads and other items."

Palm Beach County Property Appraiser Gary Nikolits says the Florida State Property Appraiser's Association, of which he is a member, supports the idea of tax relief for people who are moving, but not Domino's bill. One concern is that the bill allows the tax cap to be moved anywhere in the state.

Taking that tax protection to a poor, rural county, such as Gilchrist in North Florida "could literally wipe their properties off the tax roll," Nikolits said. "We think there's probably a better way of doing it."

Domino devised his bill after former Palm Beach Mayor Leslie Smith asked legislators for assistance in lowering property taxes.

Nikolits fears the bill could be a bail-out for billionaires. There can be a several-million-dollar difference between the capped tax rate and the uncapped market value of homes in Palm Beach and other barrier island towns, he said.

"There is no reason on God's green Earth that those people should be able to transfer that million-dollar cap," he said.

If Domino's bill makes it through the House and Senate this year, it would become a referendum that would have to be passed by Florida voters before taking effect. The earliest it could be on the ballot is the fall of 2006.