Perhaps the most important lesson about tax breaks is this: You have to know when you are eligible, and then you have to ask for them.
The D.C Official Code contains two popular real-property tax exemptions: the homestead exemption and the senior-citizen real-property tax exemption. These exemptions can save a homeowner many thousands of dollars annually. Understanding the eligibility rules is key because the tax savings are significant — and there are serious penalties for those who receive these tax benefits despite being ineligible.
In these times of tight municipal budgets, you’d better believe the District is aggressively auditing these valuable tax exemptions. In 2006, the Office of Tax and Revenue established a separate Homestead Audit Unit. According to the office’s spokeswoman, Natalie Wilson, the audit unit conducts approximately 10,000 “annual” audits and up to 3,000 “daily” audits.
The properties selected for annual audits are chosen randomly. The daily audits are triggered by tax fraud tips, rental reports, multiple-property ownership records, duplicate homestead applications, audits of senior citizens with more than $100,000 in total household federal adjusted income and other researched reports that could indicate underpayment of taxes.
This unit has been quite successful. In fiscal year 2010, it collected approximately $6.6 million in additional revenue for the District’s coffers. There is no statute of limitations on how far back the District can audit, bill and seek to collect delinquent taxes, penalties and interest. Consequently, these audits and resulting bills can amount to a significant amount of money for the unsuspecting homeowner.
The homestead exemption is available only to individual homeowners domiciled in the District who maintain the property as their principal residence. Properties owned by limited liability companies, corporations or most trusts are not eligible.
To establish the District as your domicile you must take certain steps. The District will look to see if you have obtained a District driver’s license, registered your vehicle in the District, registered and voted regularly in the District and filed federal and District income tax returns from the property listed on your homestead application. If you have not taken any of these steps, it is highly unlikely you will qualify.
Note that members of Congress and congressional aides are generally not considered to be domiciled in the District. Active-duty military personnel can declare the District as their domicile by filing Form DD 2058 with their military finance office.
In addition to the domicile requirement, the senior-citizen exemption requires that at least one homeowner be 65 or older. The household’s federal adjusted gross income must be less than $100,000.
The homestead exemption protects the first $67,500 in assessed value from tax. Under current tax rates, this reduces the homeowner’s annual real-property tax by $573.
The senior-citizen exemption can be far more valuable because each year it reduces the senior’s real-property taxes by 50 percent.
If eligible, homeowners can combine both exemptions. For example, for a home assessed at $500,000, these homestead and senior-citizen exemptions at the current tax rates will save the District homeowner $1,838 each year.
Timing is important in obtaining and canceling these exemptions. The homeowner must apply using Form FR-HD, available at the District’s Taxpayer Service Center Web site, at otr.cfo.dc.gov.
If the approved application for exemption was filed between Oct. 1 and March 31 in a given tax year, the homeowner will receive the tax benefits for the entire year. Approved applications filed between April 1 and Sept. 30 will receive only the tax benefits beginning with the second-half tax bill.
It is important to apply as soon as you are eligible. You can, for example, apply for the senior-citizen exemption immediately after your 65th birthday. The District will not entertain any retroactive applications for tax exemptions.
In a typical home purchase, settlement attorneys provide Forms FP/7C and FR-HD to you for completion, signature and notarization at settlement. They will then file them with the recorder of deeds along with your deed. If you are involved in a transaction that does not involve a settlement attorney, such as a property transfer within your family or the addition or deletion of a co-owner, you should still remember to apply for — or cancel — any applicable exemptions when you record your deed.
It’s important to cancel these exemptions promptly when the homeowner is no longer eligible. Use the Cancellation of Homestead Deduction Form available at the Taxpayer Service Center Web site. D.C. law requires the owner of the property no longer eligible for an exemption to file the cancellation form within 30 days of the date the property is no longer eligible.
Properties can become ineligible for several reasons — for example, when a property is sold to an investor or the purchaser is not domiciled in the District and becomes ineligible for the homestead exemption.
Senior-citizen exemptions are often lost when the residents move out to a nursing home but continue to own the home. Another frequently overlooked trigger is when the senior citizen’s total household federal adjusted gross income exceeds $100,000. Failure to cancel these exemptions promptly will subject the homeowner to liability for underpaid real property taxes, penalties equal to 10 percent of the delinquent tax and interest accruing each month at 1.5 percent until paid in full. If the homeowner does not pay these levies, the District can place the property on the delinquent tax list and eventually auction the property at the District’s annual tax sale.
The District’s Office of Tax and Revenue recommends that the homeowner promptly pay if presented with a bill for unpaid taxes, penalties and interest as a result of a homestead or senior-citizen tax audit. Prompt payment will keep additional interest from accruing and can also prevent your property from being put up for tax sale auction.
Should you think these audit bills are in error, your first option is to contact the Homestead Audit Unit to discuss the specifics of your situation. It can be reached at 202-727-4829. The District will consider written requests for waiver of penalties and interest on a case-by-case basis. If those informal steps do not result in a satisfactory resolution, you can formally appeal using the D.C. Form Appeal Application, also available at the Taxpayer Service Center Web site.
Harvey S. Jacobs is a real estate lawyer in the Rockville office of Joseph, Greenwald & Laake. He is an active real estate investor, developer, landlord, settlement attorney and lender. This column is not legal advice and should not be acted upon without obtaining your own legal counsel.