By James E. Savitz, Esq.
Effective January 1, 2008, Maryland has amended its rules regarding the Homestead Tax Credit. This credit or reduced tax is given to owner occupants, as distinguished from investors, who pay a higher tax rate. In addition, the Homestead Tax Credit is used to limit increases over the prior year’s taxes. For example, in Frederick and Montgomery Counties, taxes cannot increase by more than ten percent (10%) over the prior year’s bill. The amount that would have been part of the tax bill is reduced to the statutory maximum by a credit shown on the tax bill (The Homestead Tax Credit).
There has recently been a great deal of confusion about tax bills and Homestead Credits. Upon the transfer of ownership to a new owner, the existing Homestead Credit is no longer available. The tax amount will increase to the full amount reflected on the tax bill. The purchasers have usually been disclosed the tax amount that reflects the reduction of the Homestead Tax Credit. However, they will not have that credit available to them upon issuance of the next tax bill. For example, the taxes disclosed to the purchasers are $3,000.00 annually, although that is after a $1,200.00 Homestead Tax Credit. Thus, when the purchasers receive their new bill, the next payment due will be $4,200.00 or $100.00 more monthly than the purchasers had expected. This increase may now make the payments unaffordable to the new owners, or even cause them to not qualify for their loan.
Under the new procedures in Maryland, all properties are going to be treated as investment properties, unless the owners specifically apply for the Homestead Tax Credit. This is a one time application that can be filed on-line, or by returning an application to the State Department of Assessments and Taxation. The forms to apply for the credit will be mailed to every homeowner with their new tri-annual assessment notice. It is crucial that the homeowner not ignore the notice or simply file it away. In order to receive the Homestead Tax Credit, the owner must file the application in a timely manner. For those homeowners who are not receiving their new assessment notice this year, they can wait until their properties are assessed in 2009 or 2010 to submit their application.
The State Department of Assessments and Taxation has indicated that new purchasers of properties will be mailed a Homestead application by the Department. Information regarding the new Homestead Tax Credit Application can be found online at www.dat.state.md.us, or The Tax Division can be reached at (410) 767-2165.
For the Realtor, it is important to explain to the Buyer that it is likely that their first tax bill may not reflect the previous owner’s Homestead Tax Credit. Instead, the new bill is likely to be more expensive than that which the seller will be paying. Realtors are urged to locate the correct tax bill online and give a copy of the bill to the Buyer. This will not only show the Buyer what the taxes are likely to be without the Homestead Tax Credit, but will also protect the Realtor from claims that the Realtor failed to disclose the proper tax amount.