House Bill 1499 – The Circuit Breaker

1. House Bill 1499 – The Circuit Breaker • William A. Rodda, CAE • David Baker, PPS • Lee Harris • Shea Denning

2. Tax Relief for Homeowners Why is this an issue? Response to rapidly rising property values in some locations. Unfunded mandates and local pressures leading to higher tax rates. Aging population/increased demand for services. Economic uncertainty.

3. Tax Relief for Homeowners Major Complaints about the Property Tax: Tax liability not always related to current income. Some property owners face steep increases in value after reappraisal. Perception of taxes being too high.

4. Property Tax Limitation Programs Rate Limitations Levy Limits Limits on Assessment Growth Split Roll Taxation Homestead Exemptions Circuit Breakers Deferrals

5. Advisory Commission on Intergovernmental Relations - 1995 Comprehensive national report of tax and expenditure limitations (TELs) in 46 states: Property tax rate limitations for all local governments or specific functions (42) Levy limits/revenue limitations (27) Limits on revenue or spending increases (10) Limits on assessment increases (7) Full disclosure (truth-in-taxation) for levy increases other than reassessment (22) J. Wayne Moore, 73rd Annual IAAO Conference

6. How Do These Things Happen? Real property values increase faster than the CPI Same tax rates produce a “windfall” Local officials blame it on value increases and the assessor’s office Citizens infer that assessment increases are the problem Citizens demand that the property tax be “fixed” Obvious solution – assessment caps Assessment caps in place – inequities begin New demands for a “fix”

7. Current Homestead Exclusion Must be 65 years old or permanently and totally disabled, and: Income must be less than $25,000 (2008) If qualifications are met, the greater of $25,000 or 50% of the value of the permanent residence and related improvements will be excluded from taxation.

8. Current Homestead Exclusion More than 100,000 North Carolinians claimed the Homestead Exclusion in 2006. About $3.8 billion is excluded, representing $24.8 million in county revenue alone.

9. Points to Consider The property tax seems to be considered the least favored tax (except perhaps the land transfer tax!) The property tax is the most visible tax. The property tax is a tax on wealth or worth, not necessarily income. Property tax relief is politically popular with little down side for a legislator.

10. NCAAO and NCTCA recommended: Clear, concise definitions for “permanent resident,” “residence,” and “income”. A required minimum residency period of at least 5 years. A statutory application process. If income-based, access to income tax information from the NC DOR.

11. Circuit Breaker • All definitions provided for in the exclusion statute -- G.S. 105-277.1 -- apply to the Circuit Breaker (G.S. 105-277.1B) • Code • Income • Owner • Permanent residence • Totally and permanently disabled

12. Circuit Breaker • One new definition -- Property Tax Relief: • The property tax homestead exclusion provided in this section or the property tax homestead circuit breaker provided in G.S. 105-277.1B

13. Election • A taxpayer who qualifies for both types of property tax relief may elect the exclusion or the circuit breaker. • If the property is owned by two or more persons all must qualify for both types of relief and all must elect the circuit breaker for it to be allowed instead of the exclusion.

14. Circuit Breaker • Timely Application – Up to June 1st • A notice must be printed on the county’s listing form.

15. Circuit Breaker • Qualifying Owner • Must be a North Carolina resident • 65 years old or totally & permanently disabled • Occupied property as permanent residence for 5 years or more.

16. Circuit Breaker • Income Eligibility Limit • No more than 150% of the exclusion income limit. • If the exclusion income limit is $25,000 the circuit breaker income limit is $37,500

17. Deferred Amounts • May defer portion of tax on residence • Taxes that exceed 4% of income if income is less than homestead exclusion. • Taxes that exceed 5% of income if income is equal to or greater than homestead exclusion but less than 150% of homestead exclusion limit.

18. Income Taxes

19. Circuit Breaker • The maximum amount of taxes owed is the total of all taxes: • County • Municipalities • Special Districts • Does not include fees.

20. Circuit Breaker • If a taxpayer’s income is $30,000 the maximum amount of taxes paid would be $1,500. • If the taxpayer’s taxes were $2,500 the amount of deferred taxes would be $1,000.

21. Circuit Breaker • 3 previous years of deferred taxes are a lien on the property. • Assessor must notify property owner by September 1 of each year of the amount of deferred taxes and interest.

22. Circuit Breaker Deferred taxes due upon a disqualifying event • Death • Transfer of property • No longer permanent residence

23. Transfer of property is not a disqualifying event if: • The owner transfers property to either a co-owner or to a spouse as part of a divorce proceeding, and • That individual occupies the residence, and • That individual elects to continue deferring the taxes.

24. Death is not a disqualifying event if: • The owner’s share passes to either a spouse or co-owner, and • That individual occupies the residence, and • That individual elects to continue deferring the taxes.

25. Prepayment • All or part of the deferred taxes and accrued interest may be paid at any time. • Any partial payment is applied first to the accrued interest.

26. Circuit Breaker • Interruption of Qualification • Reasons other than a disqualifying event or • Taxpayer removes himself/herself from program in writing.

27. Multiple Owners • If the property is owned by two or more persons all must qualify and all must elect the circuit breaker for it to be allowed.

29. Example # 1 • Sam Jones is 70 years old. For the past 40 years, he has lived at 238 Dogwood Drive in Wake County in a two-story home situated on a ¾ acre lot. His income in 2008 was $30,000. • Wake County’s 2009 tax rate is $ .65 per hundred. • Sam’s house and lot were valued in Wake County’s 2008 reappraisal at $350,000. • Sam submitted an application for the circuit breaker benefit on January 9, 2009. • Is he eligible for the benefit?

30. Is Sam eligible for the benefit? • Does he meet the requirements for the homestead exclusion (other than the income requirement)? • He is 65 years old or older. • He is an N.C. resident • But his income exceeds $25,000 • Does he qualify for the circuit breaker? • Has he lived in the home for five years? • Is his income no more than 150% of the homestead exclusion limit? • For 2009, 2008 income must be no more than $37,500.

31. What is the benefit? • If income is less than homestead exclusion limit, then owner may defer property taxes that exceed 4% of income • If income equals or is greater than homestead exclusion limit, then owner may defer portion of taxes that exceeds 5% of income. • Sam meets Test 2. • What are the taxes on his home and lot? • Value $350,000; Tax rate: $.65 • 2009 taxes: $2,275.00 • What is 5% of Sam’s income? (5% of $30,000) • $1,500.00 • Taxes that exceed that amount ($1,500) are deferred • $775 in taxes are deferred • Sam pays $1,500.00 in taxes in 2009.

32. Example #1 – change the income • What if Sam’s income in 2008 was $24,000? • If income is less than homestead exclusion limit, then owner may defer property taxes that exceed 4% of income. • 4% of income is $960. • Taxes are $2275.00. ($350,000 x .0065) • $1315.00 deferred • Sam pays $960.00. • What if Sam had elected the homestead exclusion rather than the circuit breaker? • Then Sam would have paid $1137.50 in taxes. ($175,000 x .0065) • Nothing would have been deferred.

33. Sam in the City • Sam’s house and lot are still in Wake County and are valued at $350,000. • His income is $30,000 again. • One new fact: His house is in the City of Raleigh. • Raleigh’s tax rate is $.45. • Remember that Sam is entitled to deferment of all taxes that exceed $1,500. • What is Sam’s total tax bill now? • Wake County: $.0065 ($350,000) = $2275.00 • City of Raleigh: $.0045 ($350,000) = $1575.00 • Total: $3,850 • $2,350 in taxes deferred. Sam pays $1,500.

34. Who gets Sam’s money? • Sam pays $1,500.00. Who gets what portion? • Total tax rate: $.65 + $.45 = $1.10 • County’s rate is 59% of total rate. (.65 ÷ 1.10) • City’s rate is 41% of total rate. (.45 ÷ 1.10) • County gets 59% of $1,500 • $885 • City gets 41% of $1,500 • $615

35. What is the deferred amount? • Total deferred amount: $2,350.00 • For the county? • 59% of $2350.00 = $1386.50 • For the city? • 41% of $2350.00 = $963.50 • Remember that assessor must notify taxpayer of total deferred amount each year.

36. “Lost in love” (disqualification) • Sam, a widower, meets Maude at Raleigh Bingo night. • In September 2011, Sam and Maude fly to Las Vegas to get married, and decide not to come back. • On October 12, 2011, Sam sells his house and lot to Jason and Christie Burns. • As of the date of the transfer, deferred city and county taxes on the property total $4,940.88. • When are these taxes due? • Taxes are payable within 9 months of disqualifying event. • By July 12, 2012 • Does interest continue to run? (Yes) • Can enforced collection remedies be used before the end of 9 months? (No) • What about the 2011 taxes? • Assessed at market value; no deferred taxes

37. Nine months later . . . • Sam and Maude fly to London on June 25, 2012, where they plan to stay for at least 6 months. • The deferred taxes on the property at 238 Dogwood Drive in Raleigh remain unpaid as of August 30, 2012. • What can the tax collector do to collect these taxes?

38. Who is on the hook? • GS 105-366 authorizes the tax collector to proceed against property owned by the taxpayer who owes delinquent taxes, so . . . • Who is the taxpayer? • For purposes of collecting delinquent ad valorem taxes assessed on real property under G.S.105‑366 through G.S. 105‑375 “taxpayer" means • the owner of record on the date the taxes become delinquent • and any subsequent owner of record of the real property if conveyed after that date.

39. When did these taxes become delinquent? • GS 105-360 states that taxes paid on or after January 6 following the due date are delinquent and are subject to interest charges. • So, were deferred taxes for 2009 delinquent on January 6, 2010? And deferred taxes for 2010 delinquent on January 6, 2011? • But these taxes were payable within 9 months of a disqualifying event. • So date of delinquency is 9 months and 1 day after disqualification. • Owner on that date personally liable.

40. Baby come back • Sam traveled with Maude to Las Vegas, but called off the wedding just as they entered the Elvis chapel. • Sam returned to his Raleigh home. He wrote a best-selling novel about his adventures with Maude. • Sam received the circuit breaker benefit in 2009, 2010, and 2011. • In 2012, Sam’s income exceeded the allowable limit. • He continued to earn too much in royalties to qualify for the circuit breaker benefit. • In February 2020, Sam sells his house and moves to Florida to live near his oldest daughter. • What happens in 2012 when Sam no longer qualifies for the circuit breaker? (Three years of deferred taxes are on the books.) • What happens in 2020? (Deferred taxes for 2009, 2010, and 2011 are due)