The Home Farm and the Homestead Tax Credit
Updated: Jul 23, 2020
By Sarah Everhart
This post is not legal advice. See the site’s reposting policy here.
The State of Maryland provides property tax relief to homeowners for their personal residences in the form of the Homestead Property Tax Credit. The Homestead Credit limits the increase in taxable assessments on principal residences each year to a fixed percentage. Every county and municipality in Maryland is required to limit taxable assessment increases to 10 percent or less each year. See the Homestead Tax Credit rates for each local government in Maryland.
The Homestead Tax Credit is calculated on any assessment increase exceeding 10 percent (or the lower cap enacted by the local governments) from one year to the next. The credit is calculated based on the 10-percent limit for purposes of the State property tax, and 10 percent or less (as determined by local governments) for local tax. In other words, a homeowner pays no property tax on the market value increase above the 10-percent limit. Here’s an example of how the Homestead Tax Credit functions:
Assume that your old assessment was $100,000 and that your new phased-in assessment for the first year is $120,000. An increase of 10 percent would result in an assessment of $110,000. The difference between $120,000 and $110,000 is $10,000. The tax credit would apply to the taxes due on the $10,000. If the tax rate was $1.04 per $100 of assessed value, the tax credit would be $104 ($10,000 ÷ 100 x $1.04).
Many types of homeowners reap the benefits of the Homestead Tax Credit, including farmers who reside on their farms. These farms are often referred to as home farms. Farmers residing on home farms need to be careful about potentially losing the Homestead Tax Credit when transitioning ownership of a home farm to a business entity. The legal specialists at ALEI often educate Maryland farmers about the benefits of utilizing business entities or organizations as way to reduce personal liability exposure, plan for the future, etc. To learn more about business organizations, check out this ALEI publication and the business organization blog post series.
A homeowner who is an active member of an agricultural ownership entity (family corporation, general partnership, limited liability company (LLC), or limited liability partnership (LLP)) is qualified to receive the Homestead Tax Credit (Maryland Code, Tax Property Article, Section 9-105). An active member is defined as (i) a shareholder in a family corporation; (ii) a partner in a general partnership; or (iii) a member of a LLC or partner in a LLP who has or shares the authority to manage, control, and operate the LLC or LLP and who shares assets and earnings of the LLC or LLP under either an operating or partnership agreement.
It is important to note the law requires that an agricultural ownership entity own the home farm property, personal property to operate the farm (farm equipment), and no other property. Therefore, if a farmer owns other farm acreage separate and apart from the home farm, it may be necessary to form a separate ownership entity for that acreage to prevent being disqualified for the Homestead Tax Credit. To preserve the right to use the Homestead Tax Credit, the dwelling on the home farm must also have been owned and occupied by the active member at the time of its transfer to an agricultural ownership entity. This is also true if the organization is a newly formed LLC from what was previously a partnership, at the time the dwelling was originally transferred to the partnership.
In addition, the agricultural ownership entity and the active member who occupies the home farm must apply to the State Department of Assessments and Taxation to establish eligibility for the Homestead Tax Credit on or before June 30 for the following year, and may be required to verify continuing eligibility. Only one dwelling owned by an entity is eligible for the Homestead Tax Credit and likewise, an active member may not claim the credit for more than one dwelling. Applications for the Homestead Tax Credit may be filed electronically or by mail. See more information on Maryland’s Homestead Tax Credit.