Idahoans have seen real estate values climb the past few years. The increase poses a series of challenges for the Idaho Legislature.
In May, the Boise Regional REALTORS revealed that the median home price in Ada County was $342,990, up 12.5% from a year ago. The Snake River MLS in April reported that the median price in Bonneville County was $205,450, up from $190,000 a year ago. And, the CDA MLS in May indicated that Kootenai County’s median price was at $298,914, up 11% from a year ago.
The rapid boost in home value is impacting two Idaho measures designed to protect owner-occupied housing: the homeowner’s exemption (which reduces property taxes) and the homestead exemption (which shields equity).
The homeowner’s exemption was implemented by ballot initiative in 1982 and exempted half of the value of the home and improvements (but didn’t protect the value of the land) from property taxes. The exempt portion was capped at $50,000 and applied to second homes and rental properties. In 1983, the Legislature passed a bill to cut the exemption to only $15,000. Gov. John Evans vetoed the bill. A compromise was crafted to preserve the $50,000 exemption but restrict it to only owner-occupied residences.
In 2006, the Legislature broadened the exemption to cover both land and improvements on the land and, in turn, boosted the dollar amount to $75,000. And, to deal with future changes in value, the exempt amount was indexed to a federal calculation of Idaho home prices. That boosted the exemption all the way to $104,491 in 2009 and then it fell as the recession dropped home prices, bottoming at $81,000 in 2013 and then edging up again until the amount was fixed at a flat $100,000 in 2017.
The challenge now is that with real estate values climbing, many Idaho homeowners are seeing the exemption capped at $100,000, meaning more of the home’s value is exposed to property taxes. For instance, at Ada County’s most recent median price of $342,990, $100,000 in value is not subject to property taxes while $242,990 is unprotected.
Just last year, the unprotected portion was $204,800. Thus, while value increased 12.5%, the portion of value to which property taxes are applied climbed by nearly 19%. Many urban areas are being particularly hard hit with owner after owner seeing the exemption covering less and less value and property taxes moving up.
This year Rep. John Vander Woude (R-Nampa) and Sen. Maryanne Jordan (D-Boise) teamed up on a bill to remove the cap on the exemption and index it in the future. It failed to gain traction.
Because of pressure from homeowners in high-cost markets (which more and more of the state is becoming as real prices rise), it is likely we will see further attempts to boost the homeowner’s exemption. There are two potential downsides that need to be considered.
First, if homeowners pay less in property taxes that means other property owners will pay more. That means commercial and non-owner-occupied residential will shoulder more of the load. That was the impact under indexing after 2006. Right now more of the burden is shifting back to homeowners. The key question: What is the “right” mix?
Second, I have seen some data that shows that boosting the homeowner’s exemption will shift more of the tax burden for owner-occupied residential properties to lower valued ones. The reason is that those properties under the current system are shielded by the 50% of value exempt element. But, if higher value properties receive more of an exemption with lesser valued ones receiving no greater break, the bottom line is that those of lesser value will pay more because they will constitute more of the tax base. That impact could be mitigated, if policymakers choose, by eliminating the 50% of value provision or raising the percentage, as that would boost the benefit to lesser valued properties
The next major area of concern is the Idaho homestead exemption which protects an Idaho homeowner’s equity up to $100,000 from the reach of creditors. Even with a spouse, the cap is still $100,000 total. Assume an Idaho resident has a home worth $200,000 with an existing lien (for their home loan) of $150,000. If a creditor were to sue this person and obtain a judgment they could not have the property seized and sold — because of the homestead exemption. The size of the Idaho homestead is a key reason that most Idahoans who file bankruptcy can keep their home (as long as they can keep the loan current). The bankruptcy trustee is usually prohibited from seizing the equity protected by the homestead.
The issue is that the homestead has been capped at $100,000 for some time. With higher home values many Idahoans of fairly modest means now have equity above $100,000, putting them at risk of losing their home if sued or if they file a bankruptcy. Another concern is if an owner’s equity grows while case is open, generating a windfall for a bankruptcy trustee or a suing creditor.
Some of the surrounding states have bigger homesteads than Idaho’s. Washington’s homestead is $125,000 and can be doubled for spouses to $250,000. In Montana, the number is $250,000 while in Nevada the number is $550,000. Oregon, Utah and Wyoming’s are smaller than Idaho’s.
The Legislature may want to consider boosting the number or indexing it to future increases in home value. It might also exempt post-filing appreciation after a lawsuit or bankruptcy is filed.
The goal of the homeowner’s exemption and the homestead exemption are to benefit and protect homeowners. Currently, they are arguably falling short.