A bill flying under the radar would redefine what constitutes a homestead in terms of property taxes.
Changing the definition of a homestead could be the most substantive property tax relief for homeowners this session.
In 1979, the General Assembly created a definition of homestead that has been interpreted in the same manner for over forty years. As originally enacted, the definition of homestead was interpreted as one house and a garage. In the original act, the state reduced homestead property taxes by providing local units of government with a state funded homestead credit. In essence, the state paid some of the property taxes for homesteads.
I suspect the state limited the amount of property included as a “homestead” so they were not paying property tax relief to people who owned multiple buildings on their property. The interpretation to limit homesteads to one house and one garage limited the exposure of the state budget and treated all homesteads the same. The homestead applied to basic shelter and not extra items such as swimming pools or multiple storage buildings.
As part of a larger property tax relief proposals, the state stopped funding the homestead credit. However, the definition remained in code for several reasons. Counties could still provide an additional local homestead credit funded through local income taxes so the definition was still essential. A second reason was the definition was used for the standard deduction which excluded some assessed value from taxation.
In 2010 voters approved a Constitutional amendment to limit a homestead’s property to 1% of the gross assessed value of the homestead. The question on the ballot referenced “homestead” and at the time it was defined as one house and one garage.
Ruling prompts change
In 2022, the Indiana Tax Court ruled that a homestead definition was not limited to one house and one garage. In a reaction to the Tax Court, SB 325 seeks to re-define homestead. A broader definition to include more structures than the one house and one garage are being considered. The broader definition will benefit homeowners with multiple buildings and structures; however, homeowners with one house and one garage will not benefit from the new definition.
The liability of homestead as a percentage of the overall property tax bill has increased in recent years due to the fact the value of homes has increased more than the value of other classes of property. Also, narrowing the business personal property base has slightly increased the taxes on homesteads.
A broader definition of homestead will result in less net revenue from property taxes for local units of government. Narrowing the tax base, or limiting more property to a 1% cap, could also have an effect on the rate needed to collect funds for taxpayer approved school funding. Proposals to narrow or limit the tax base could result in higher property tax rates.
Changing the definition of homestead could be one of the more substantial property tax proposals this session. Any definition used as a basis to collect taxes needs to be clear so taxpayers and tax administrators can apply the objective standard.
The tax implications of changing the definition of homestead remain uncertain, especially coupled with other property tax changes being considered this session. Any change in the definition of homestead will affect all the parcels in the state, not just the 1.8 million homesteads parcels.
David Bottorff
Executive Director of the Association of Indiana Counties, an organization representing county government and county officials.
