Each year, the U.S. loses over a billion dollars to homestead exemption fraud; squandering funds that would otherwise be used to support schools, public safety, and local infrastructure. Auditing for this type of tax fraud has become particularly complicated in recent years, as the rising short-term rental (STR) market adds a new, fast-growing variable to homestead qualification.
State governments first placed limits on property tax rates after the Great Depression to reduce property tax delinquency and prevent local communities from collapsing into mass homelessness and public ownership of housing. The law has since evolved from blanket property tax breaks to varying amounts and types of exemptions as determined by each state (property tax credits, property tax deferrals, etc.). For the states that do provide homestead exemptions, the goal is ultimately to create the right property incentives for a functioning community.
When unqualified STR operators claim exemption, however, they take revenue away from public services funded by tax-paying residents. Considering homestead exemptions date back to the 1930s, STRs are exposing gaps in legislation. 2-4% of US homestead exemptions are unqualified and STRs are on the rise, so governments need tech solutions to identify and correct homestead exemption fraud more than ever. Here are some ways state governments can curb property tax fraud in today’s STR era.
Identifying homestead exemption fraud is more complicated than it seems
Three main criteria determine whether a homeowner qualifies for a homestead exemption:
The third criteria (above) is where qualification becomes complicated. With COVID pushing people out of cities and blurring the line between primary and secondary homes, governments need homestead monitoring partners to identify nuances like where these homeowners pay utilities, work, and register to vote, or whether they rent out the property.
“Primary residence isn’t a ‘yes or no’ question,” said Tyler Masterson, co-founder and CEO of TrueRoll in a recent webinar. “There are so many variables at play, many of which are hard to prove. Automating these rules can make government agents’ jobs a lot easier because it takes the manual guesswork out of identifying a potentially defining factor.”
That said, governments shouldn’t expect a one-size-fits-all solution across the entire country. Each state interprets homestead exemption law differently and individual jurisdictions and taxing districts add in their own codes — after all, these are the local communities that directly benefit the most. However, the end result is a spectrum of interpretations and implementations of the same policy.
“One end of the spectrum is direct, literal interpretation that grants qualification as long as someone is in the property by January 1 with a toothbrush and sleeping bag,” said Masterson. “The other end is an interpretation of the meaning of the law: homestead might be denied if someone has a single house but works and sends their kids to school out of state.”
The interplay between STRs and homesteads: Is it even an STR?
To avoid confusion, the criteria for an STR to be considered a homestead needs to be defined explicitly and legislatively. STR legislation is still in its early stages nationwide. For example, STR ordinances only date back to 2015 in New Orleans and 2018 in Knoxville and will continue to evolve in the coming years.
Even in its infancy, STR legislation is subject to the variability of homestead exemption law. Florida denies exemption to properties rented for 30 or more days for 2 consecutive years, while Chicago defines a “vacation rental” as any rental unit where the tenant is living without the landlord.
“Loose interpretations of STRs show up all over the country,” said Masterson. “It’s crucial for local legislatures to establish what a STR really is to determine its intersection with homestead exemption law.”
Once a definition of STRs is in place, agents then face the challenge of identifying STRs and vetting them for homestead exemption fraud. Only 10% of STR hosts voluntarily register, while others use fake account names or hide their contact information from online listings. Given all the possible tactics to attempt to avoid government detection (even by accident), manually tracking each and every property in a given jurisdiction is nearly impossible.
“It’s not as easy as pulling up a list of rental properties and fitting them under your jurisdiction’s definition of STR,” said Masterson. “Some hosts rent their properties on non-traditional sites like Craigslist, while others might throw out misleading signals such as conflicting mail and voter registration addresses. It’s important to account for any possibility when monitoring STRs.”
Compliance solutions help governments fight fraud and do good
The end goal of eliminating homestead exemption fraud is to keep tax dollars funneling through local communities to support libraries, schools, transportation, first responders, and other infrastructure. But to make an intelligent determination of an STR’s homestead qualification, local bodies first need to answer fundamental questions: Where is the property? Who owns it? How long has it been rented?
Solutions like Granicus’ Host Compliance platform can help state governments monitor the properties in their jurisdiction and ultimately get the answers they need. “Our Host Compliance Address Identification product directly answers the ‘where’ and the ‘who,’ while our Rental Activity Monitoring solution can identify how often a property is rented and how much money it generates,” said Ulrik Binzer, general manager of compliance services at Granicus.
These capabilities empower governments to monitor what properties are being rented, and for how many days of the year, which in turn helps homestead tax auditors make more informed decisions about exemptions and fraud. But when agencies team up with partners like TrueRoll and Granicus, they’re able to do more than target and eliminate fraud. Together, they can also identify qualified, but unclaimed exemptions and get back to the law’s original goal: helping people.
“Oftentimes, homeowners don’t even know they’re qualified for a homestead exemption,” said Masterson. “We want to make sure they receive the relief they’re entitled to.”
The homestead exemption law started as a public service meant to help residents of local communities. Equipped with identification and monitoring solutions, government agencies can gain a crystal clear view of all homestead exemptions — qualified and unqualified, claimed and unclaimed — and eliminate fraud while serving the community.
For more on homestead exemption fraud, watch our recently recorded
webinar here.
For a complimentary assessment of the short-term vacation rental market in your community, including listing counts, type of STR units, and more, click here.
