The Taxpayer Relief Act, Act 1 of Special Session 1 of 2006, was signed on June 27, 2006. The Taxpayer Relief Act provides for property tax reduction allocations to be distributed by the Commonwealth to each school district. Property tax reduction will be through a “homestead or farmstead exclusion.” Generally, most owner-occupied homes and farms are eligible for property tax reduction. Only a primary residence is eligible for property tax relief.Homestead/Farmstead Exclusion (Act 50)
What are homestead and farmstead exclusions?
What is the homestead exclusion?
The homestead exclusion is a way to target real property tax relief to homeowners who have their permanent residence in the taxing jurisdiction (school district, county, or municipality). The homestead exclusion reduces the assessed values of homestead properties, reducing the property tax on these homes. The homestead exclusion provides the same dollar tax reduction to all eligible properties in the taxing jurisdiction, including houses on farms, condominiums, single family homes, and other places of a permanent residence owned by the occupant.
The homestead exclusion allows homeowners real property tax relief of up to one-half of the median assessed value of homesteads in the taxing jurisdiction (county, school districts, city, borough, or township).* If the median assessed value of homesteads in a school district is $40,000, for example, the school district may provide for each homestead property an exclusion in the tax assessment of up to one-half of that median, or $20,000. The actual exclusion allowed will be set by the school district. All homestead properties in the school district will receive the same size exclusion, which will reduce each taxpayer's school real property tax bill. A homestead property formerly valued for tax purposes at $50,000 would be taxed as if its value were only $30,000 ($50,000 minus the $20,000 exclusion), effectively reducing its school real property tax bill by 40 percent.
What is a "homestead" property?
A homestead property is a dwelling primarily used by an owner as his or her permanent home. The owner may be living temporarily at another location, but he or she must have the intention of returning to that home. No one can have more than one permanent home at any one time. Homestead properties do not include rental units, vacation homes, camps, or other homes in which the owner does not live on a permanent basis. In general, it is the address where the owner is registered to vote and has registered his or her driver's license.
The homestead property includes the land under the dwelling, as long as it is owned by the same person who owns the dwelling. The formal definition of property is the same as that used for determining residence status for the earned income tax.
*The median value is the middle value of all homestead properties in the jurisdiction when the values are arranged from smallest to largest. The median value of 10, 25, 28, 50, and 100, for example, is 28.
Why do some people want the homestead exclusion?
The school tax reform bill (Act 50 of 1998) allows school districts to shift the school tax burden from the real property tax to the earned income tax. Under Act 50, school districts can choose to levy a higher earned income tax rate, and in exchange must use these additional revenues to eliminate nuisance (per capita, occupation, and occupational privilege) taxes and reduce the real property tax. More of the school tax revenues required locally will come from the earned income tax, and less will come from the real property tax. The homestead exclusion is intended to target real property tax relief to homeowners, to ensure that the real property tax reductions go first to those who own their own dwelling.
What is the farmstead exclusion?
The farmstead exclusion is a similar method of targeting real property tax relief to farmers. It lowers the taxes farmers pay on farm buildings (other than the farmhouse, which receives tax breaks through the homestead exclusion), as long as at least one farm owner lives on the farm. This reduction is in addition to other existing real property tax relief programs aimed at farms, such as Act 319 (often referred to as "Clean and Green"), which reduces the assessed value of farmland.
The farmstead exclusion allows farmers real property tax relief similar to that provided to homeowners by the homestead exclusion. By law, if a homestead exclusion is offered in a taxing jurisdiction (county, school district, city, borough, or township), the farmstead exclusion also must be offered. The farmstead exclusion is set by the governing body and cannot exceed the amount of the homestead exclusion.
What is a "farmstead" property?
A farmstead property includes all buildings and structures that are used primarily for agricultural purposes (such as housing animals or storing supplies, production, or machinery) on a farm of ten contiguous acres or more in size. The farmstead must be the permanent residence of at least one owner, as defined under the homestead definition. The farmstead exclusion would be applied to buildings and structures that are not already exempt from real property taxation under other laws. The requirement that an owner lives on the farm means that farms owned and operated by absentee owners will not be eligible for the farmstead exclusion.
Why do some people want the farmstead exclusion?
The farmstead exclusion is intended to target some additional real property tax relief to farmers, who also argue that the real property tax is particularly unfair to them. Compared to other local businesses, some argue, farmers pay an unfair amount of local taxes. Unlike other local businesses, the majority of a farm's productive assets (land and buildings) are subject to local taxation through the real property tax. This isn't true for most nonfarm businesses, whose productive assets are nontaxable items such as machinery, inventory, and office equipment. Compared to businesses of the same size in their communities, farmers thus can owe much more in real property tax.
In addition, as for other taxpayers, the amount farmers owe in real property tax is not directly related to their ability to pay those taxes. The taxes are based on the value of the land, including its speculative value for development, and not on the value of what farmers can make from farming that land. The "Clean and Green" program helps reduce taxes on the farm land to what can be made from farming, but it does not apply to the buildings on a farm.