Giant Property Tax Breaks For Some: But What About Long-Term Rental Owners?

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by Arnaud and Naja Girard…….

A few months back The Blue Paper discovered an infamous loophole by which the City of Key West rewards illegal vacation rental owners with transient rental licenses. This week a closer look at Monroe County’s property taxes revealed another troubling disparity: Some property owners have maneuvered to pay up to nearly 10 times less in property taxes than other owners of comparable properties.

This loophole is called the “income approach” and as you’re going to see, it’s made some very rich people even richer. But if Commissioner Romero has her way, it could also become one of the strongest tools used to fight Key West’s housing crisis.

Under the income approach taxable value is determined by measuring the amount of income generated by a property (rather than the actual real estate market value) “I’ve been speaking with Property Appraiser, Scott Russel and State Representative Holly Raschein,” Commissioner Romero told The Blue Paper, “The goal is to create a tax incentive for long-term workforce rental housing using the income approach.”   The property assessment method is already in use in Key West and it does result in considerably lower property taxes but, not surprisingly, it has thus far favored only the biggest property owners and the most lucrative transient rentals.

Here’s what we found:

Most of the big hotels on the island, like the Casa Marina, don’t pay property taxes based on the market value of their waterfront property. They pay in proportion to their profits. That is the “income approach. No special legislation is required. The decision to use the income approach rather than looking to comparable sales [real estate market value] is left to the discretion of the property appraiser.

For instance, in 2000 when the Walsh family, owners of Ocean Properties Hotel Resorts, was hit with a property tax hike for their 32 luxury waterfront cottages on Sunset Key they sued the Property Appraiser to force him to assess their properties under the income approach. Irwin Higgs, the Property Appraiser at the time, finally settled for an income approach assessment, but complained that the Walshes had been refusing to disclose how much money they were actually making on Sunset Key. Propert values are currently appraised as low as $75 per square foot for the land beneath their $800/night waterfront cottages, while other homeowners on the exclusive offshore island pay on the basis of as much as $600 land value per square foot.

Similarly, over at Sunset Marina on Stock Island the property appraisal method was switched to the income approach after attorney Barton Smith became the new owner in 2013 and filed a petition challenging his assessment.  The taxes were reduced from $67,000 in 2012 to $30,000. Interestingly only Mr. Smith’s slips were devalued. The other individual slip owners in the “dockominium” kept paying the full rate. When The Blue Paper looked into this disparity it was discovered that the methodology used to assign new values to Smith’s properties was, in part, contrary to Florida Statute.

A few weeks later the Property Appraiser informed Mr. Smith that he was discontinuing the use of the income approach for Smith’s properties. Yet Mr. Smith is still going to pay more than 50% less in taxes* on those 31 slips than other individual slip owners. Indeed, even though the income approach value was admittedly excessively low, the law allows the taxable value to increase only at the rate of 10% per year.* It could take as many as 10 years for Mr. Smith to begin paying the same amount of taxes as his neighbors. Smith filed a petition with the Value Adjustment Board last week, challenging the Property Appraiser’s decision.

Clearly the tax code allows for a lot of flexibility. The burning question is why, in Key West, with its overheated economy, are property tax assessments favoring the most lucrative activities and most affluent citizens and not the embattled and desperately needed long-term rentals?

“I am told that it’s possible,” says Commissioner Margaret Romero, “But that there would be a need for some legislation. I’d like to see the Property Appraiser begin to assess rental property that voluntarily provides workforce housing at prices that are within the affordable housing guidelines under the income approach rather than on the basis of the ever-rising real estate market.” She suggests that the incentive should only apply to owners who sign a minimum one-year lease.

Commissioner Romero is also exploring the possibility of extending the homestead exemption to affordable workforce rentals. The owners of the badly needed long-term rental properties are stuck between a rock and a hard place: Assessments for single-family homes that are owner-occupied are capped at 3% increase per year, but long-term rental property owners are only protected from skyrocketing real estate market sales by a 10% cap on annual increases. “I think that if you’re providing long–term housing to local workers at affordable prices then your property should be protected by that same 3% cap,” says Commissioner Romero.

Let’s see where this goes. Stay tuned.


* The 10% cap on increase in assessed value applies to all property taxes except for School taxes.


8 thoughts on “Giant Property Tax Breaks For Some: But What About Long-Term Rental Owners?

  1. The income approach is NOT allowed for low-rent, affordable housing. In 2006, my property tax on my rentals had increased from $2,860 to $5,002 in two years. Rents were around $700 each for a total of three bedrooms. The Appraiser met with a small group of us affordable housing owners to hear our plea for the income approach. Determining our income was easy: ask for our Schedule E’s, a part of our signed IRS form 1040 tax filings, a powerful document.

    They refused to consider it.The Hilton on Pier B sold for $100 million, but was taxed at $20 million. The property I paid $250,000 for was taxed at a value of $568,000. This makes no sense.

    1. Yeah i hope by now everybody knows that the rich can fudge their income reports to where they dont have to pay any taxes. For instance, Donald Trump and General Motors pay less taxes than I do! ;=]
      In other words it only makes sense to charge commerce the same way they charge citizens: simply base taxes on property value and let the chips fall where they may.

  2. None of us are happy to read in black and white how we are clearly being treated differently (UNFAIRLY) than those who make millions off of their large real estate holdings. They who charge the most to those they provide housing to (hotel rooms, boat slips, etc) pay the very least in expenses and taxes with their corporate attorneys seeking out loopholes in the laws. They care about NO ONE but THEMSELVES. I am not surprised names like Barton Smith and the Walsh family names lead this story. I’m surprised there are not a few other family names included!
    I have one rental property in Key West and I do everything I can to keep the rent as low as possible on my 3 bedroom house in Old town renting it for $2100/month the last several years. I keep absorbing increasing costs without passing them along to the tenant, but I don’t know how long that can continue without some kind of help for those of us who truly do rent affordably to tenants.
    Commissioner Romero is on the right track. Let’s hope she succeeds in her efforts to lower our taxes on ACTUAL AFFORDABLE HOUSING in Key West, and when she brings forward new legislation – that other elected politicians will support the needed change. They’ve been talking about affordable housing for as long as I can remember and all they done lately is waste $12.5 MILLION giving it away to the Peary Court investor/buyer!

  3. This proves my perception that the bigger the business, the bigger the parasite on the local community. I’ve lived here forty years and I’ve heard all new developments claim they’ll add to the tax base and lower our property taxes. What with the meteoritic rise in KW tourism profits, us local shouldn’t be paying ANY property taxes but I’ve never seen a rollback. The parasites continually demand more services for less money.
    Mr Walsh sues the tax assessor for lower taxes but won’t allow the waterfront walk to cross his Truman Annex condo/hotel so that Fort Taylor could be united with the walk all the way to Trumbo Point. Unadulterated miserliness is a millionaire’s trait and is not a pretty thing.

  4. I also own a slip at Sunset Marina. I bought it in 2013. In just those three years, the Property Appraiser’s assessed price is now 74% higher than my purchase price. From just 2013 to 2014, the assessed value rose 36% from $58,022 to $78,936.

    For the past 15 years, the Property Appraisers office has placed the exact same dollar amount on the Building Value, The Total Just (Market) Value, The Total Assessed Value and the School Taxable Value. This year, however, the Total Assessed Value is different than the Total Just (Market) Value. Instead of the assessed value rising by some arbitrary amount, this year it rose by EXACTLY 10% (down to the penny), and all of the others rose by 15.3%. As Naja noted, 10% is the same maximum percentage increase that is allowed for the Bart Smith owned slips. Does the Property Appraiser think that by now putting the rest of us on Smith’s rate of increase that justifies his overall tax breaks?

    I suppose that I should be happy. The assessed value could have once again risen by a lot more. On the other hand, exactly how did the Property Appraiser’s office decide upon a 10% rise in assessed value for my boat slip for the first time in 16 years?

    This just goes to show the randomness and the unfairness that is applied to similar properties that just happen to have different ownership structures.

  5. From my perhaps not totally educated POV… tax assessments are supposed to be based on the fair market value of a property. Tax appeals are raised when your assessment for an equivalent property are not consistent with a comparable neighbor. So in this case if I have a boat slip that is identical to the one next to me I could contest my appraisal based saying “hey, you have this identical piece of property appraised at 30% of the value of mine…. therefore you need to bring my assessment down to be in line”.
    The use of “income based” assessments seems like an opportunity for significant “gamesmanship”…. I can cook the books a million ways to reduce the income on a piece of property… only in the Keys could this be real…. wow!

    Oh… and hey…. what ever happened with Barton’s expansion plans? Did they get approved? As I recall several weeks ago there was an article about his grand plans to add a bunch of new housing units whilst eliminating live-aboards and coming up with a very special approach for calculating how many “affordable units” were required….

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