As Florida Draws Wave of Younger Settlers, Tax Pitfalls Loom in Prior Home State

October 28, 2020Articles Daily Business Review

Moving to Florida is no longer just for retirees. Clear trends show that a younger generation of Americans is moving to the Sunshine State, perhaps due to the COVID-19 pandemic. Single-family home sales have more than doubled in parts of the state, as these individuals and families seek additional space and amenities.

This influx could be the result of excitement over the fact that Florida has no state income taxes and generous creditor protection laws. But while there are many tax benefits, those considering moving to Florida should pause to consider the requirements to qualify for residency as well as domicile considerations and tax impacts.

Domicile Considerations

Maintaining domicile in an individual’s original state after a move to Florida will subject that individual to income tax in the departed state. Abandoning domicile in the departed state subjects only the individual’s income earned within that state to its income taxes. For example, an individual leaving New York to permanently move to Florida can be taxed by New York for income earned in Floridadespite Florida’s lack of income taxif they do not properly abandon their domicile in New York. However, if such domicile is abandoned, only income earned from New York sources, such as rental properties, is taxed in New York.

To prevent taxation in another state, those moving to Florida must take steps to ensure that the state they are leaving does not successfully assert that they retained their domicile in the state they intended to abandon. This can be particularly difficult during the COVID-19 pandemic, as many individuals are traveling to and from second homes without intent to change domicile. Physical presence in Florida for at least six months and a day is just one way to begin establishing domicile.

To properly abandon domicile in a departed state, an individual must look at that state’s laws or guidelines determining domicile. For example, Illinois, New York and Minnesota look at a variety of factors as evidence of the intent to abandon domicile. While these factors are not statutory, they influence the final determination of domicile and, if not followed carefully, can result in an audit and being pulled back into the departed state for past taxes. Factors include filing a declaration of domicile, a declaration of intent to change domicile to Florida in the county of their prior residence, location of family, the driver’s license state of issuance, state of voter registration, the address that appears on legal documents and documents pertaining to financial transactions, and more.

Florida Homestead Exemption

Florida has some of the broadest debtor protections in the country, namely the extent of the State’s homestead protection. Circumstances under which a Florida domiciliary’s homestead can be subjected to a forced sale are very limited. However, an individual seeking to qualify a Florida property as their homestead who holds homestead property in another state is required to give up their prior residence’s homestead status.

In addition to homestead creditor protections, a Florida domiciliary can apply for the Homestead Exemption if their property meets applicable lot size limitations. The timing of an individual’s move to Florida also influences whether they benefit from Florida’s Homestead Exemption, which reduces the taxable value of the homestead by up to $50,000. Those who move to Florida early in the calendar year will not benefit from the Homestead Exemption until the following year, even if they move to Florida before the March 1 homestead exemption application deadline. This is because the individual must have owned residential property and established domicile in Florida prior to January 1 to receive the deduction for that taxable year. The individual must also have a Florida driver’s license, car registration, voter ID, and immigration documents if they are not a citizen of the United States to complete the Homestead Exemption application.

To retain the exemption, the individual cannot rent out the property for more than 30 days in a calendar year, since renting the property for more than 30 days in two consecutive years constitutes abandonment of the Homestead Exemption.

Effects on Estate Planning

Individuals moving to Florida should also ensure that their estate planning documents are updated to conform to and be governed by Florida law, and to reflect that they are Florida residents. This allows them to benefit from the lack of estate tax in Florida and is particularly important if leaving a state with estate taxes, such as Illinois, Minnesota and New York. It is also recommended that any estate planning documents be executed in Florida as further evidence of domicile.

Estate planning considerations can also help reduce estate tax exposure in the departing state when the individual continues to hold property in the departed state, as such property would be subject to the departing state’s estate tax if not properly managed under an estate plan. Options can include selling the property or contributing it to an entity.

There are also a variety of benefits for Florida estates. Among these are simpler probate proceedings, though these can be costly, with attorney’s fees for estates between $5 and $10 million ranging from $120,000 and $195,000. Using trusts as an estate planning tool is recommended to avoid these fees, as Florida does not have statutory fees for trustees.  Summary administration is also available for estates of less than $75,000.

To avail themselves of all of the benefits that draw more than 300,000 people to Florida each year, individuals seeking to change their domicile to Florida should speak to a Real Estate attorney and an estate planning attorney to ensure they have properly abandoned their previous domicile.

Reprinted with permission from the October 28 issue of Daily Business Review. (c) 2020 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.