Your home is your sanctuary — and in Florida, it’s also a powerful financial shield. The state’s homestead exemption offers significant protections , from property tax savings to asset protection against creditors. But what happens when you decide to rent out a spare room? A recent ruling by the Florida Supreme Court serves as a cautionary tale for homeowners considering this seemingly harmless arrangement.
WHAT IS FLORIDA HOMESTEAD EXEMPTION?
The homestead exemption is a protection in the Florida Constitution that is defined in Article X, Section 4, providing both significant tax benefits and robust asset protection to homeowners because it shields the home from forced sale by judgment creditors. The protection is provided to homeowners that use a property as a primary residence.
Generally, the protection is granted to individuals, therefore the homestead property cannot be owned by a corporation, partnership, limited liability company (LLC), or most irrevocable trusts. Additionally, the owner must have the intent to reside in the property.
BENEFITS PROVIDED BY HOMESTEAD EXEMPTION:
Asset Protection
The homestead exemption shields a homeowner’s primary residence from forced sale by judgment creditors, offering unlimited equity protection as long as the property meets specific size requirements (up to ½ acre within a municipality and up to 160 acres outside of a municipality). Once your property in Florida qualifies as your homestead, you have unlimited creditor protection against most creditors. This is why many celebrities and wealthy business owners purchase extremely expensive homesteads in Florida. The homestead is protected in Florida whether the property is worth $10,000 or $10,000,000.
Tax Benefits:
- Reduction in Taxable Value: The exemption reduces the taxable value of a home by up to $50,000. The first $25,000 applies to all property taxes, including school district taxes. The additional $25,000 applies to the assessed value between $50,000 and $75,000 and excludes school district taxes
- Save Our Homes Cap: The Save Our Homes Cap limits annual increases in the assessed value to 3% or the change in the Consumer Price Index, whichever is lower. This keeps your property taxes from skyrocketing.
THE RISK OF RENTING OUT A SPARE ROOM:
If you’re considering renting out a room or portion of your home, be aware that doing so could jeopardize your homestead protection.
Do I lose Tax Benefits If I rent My Property
The Florida Supreme Court’s ruling in Furst v. Rebholz clarified how property tax assessors can treat rental spaces in a primary residence. This case provides clarity when it comes to the determination of how much of your truly qualifies for the homestead tax exemption when a property is rented out. Rod Rebholz, a homeowner who rented out a few rooms in his two-story home, learned this lesson the hard way. After years of claiming the full homestead exemption, he was hit with a retroactive tax lien and lost a portion of his exemption due to the rental arrangement.
Rental spaces, even within the same structure, can be classified as commercial use, subject to higher taxes.
Rebholz’s home was divided by the property appraiser for taxing purposes, outlining 85% homestead property and 15% commercial-use property. In this particular case the property appraiser also retroactively removed the fifteen percent of the property it deemed to be used for commercial purposes and assessed interest.
The Court emphasized that the purpose of the homestead exemption is to protect a person’s primary residence, not areas of the property used for generating rental income.
Do I lose Homestead Asset Protection on Rental Property
To understand the protection, we need to make a distinction between the tax exemption benefits and the protection from judgment creditors. Tax exemption rules require you to occupy your home on January 1 and file papers with the county tax assessor or property appraiser, and as long as the property is rented for less than thirty days per year the tax benefits are preserved. If the homestead is rented for more than thirty days for two consecutive years, then the homestead will no longer be considered homestead for tax benefits purposes. Also, as you can see in the case Rebholz, if part of the property is rented out (used for commercial purpose) that portion will no longer be homestead for tax benefits purposes. However, the asset protection may remain.
Whether a homestead property is still creditor-protected when rented is much more complex and fact-intensive. The analysis will focus on the intent of the homeowner and whether or not the homestead was abandoned.
Conclusion
Florida homeowners who rent out portions of their property should take note — rented areas are not considered part of the primary residence for homestead exemption purposes. And yes, there’s an exception to this exemption: if you’re playing landlord, that rented space won’t qualify. This case serves as a timely reminder that claiming the full exemption without accounting for rental use can turn into an expensive mistake.
While renting out a room or section of your home might seem like a small side arrangement, the tax consequences can be significant if those details are not properly disclosed. The Furst v. Rebholz decision makes clear that even partial rental use can expose homeowners to back taxes, penalties, and unexpected liabilities.
If you need assistance with understanding how you can protect your assets, your estate, legacy, etc, schedule a call with us.
