Updates on the Homestead Exemption and Tax Stabilization
This Article was written on August 1, 2023 - if you are viewing this article at a later day, please be advised that this information may have changed, as this article discusses bills which are currently under review by the Maine Legislature.
The Maine Homestead Exemption (36 M.R.S. § 683) provides that, effectively, up to $25,000 of the value of your primary residence may be exempt from property taxes. In effect, what this does for most Maine homeowners is reduces the cost of their annual property tax bill by approximately $400 - $500, depending on where in Maine you live. The homestead exemption is available to any qualified Maine resident who applies with their local town office. In order to qualify for the exemption, there are three requirements: (1) Be a permanent resident - you have to live in Maine, and intend to stay in Maine. This is determined by a variety of factors, including where you are registered to vote, where you claim residency on your taxes, your address on your driver’s license, and so on. (2) Have a permanent residence - you can only have one “primary residence”, so if you are claiming a homestead exemption on another property, then you cannot claim it again here (unless you are moving). An easy test (but not guaranteed) is if you live there six months and a day each year, that is your primary residence. (3) Residence is your Homestead - the property must be residential, and held in your name, or the name of a revocable trust.
The third requirement for the homestead exemption is currently under review by the Maine legislature in several bills to determine if that requirement is too restrictive. Many of my clients elect to establish what I call “Asset Protection Trusts”, or “APT”. The APT is a technical type of trust which will be discussed in detail in a future blog. The reason why this is important, is because one core feature of the APT is that it qualifies as an irrevocable trust. The definition of homestead requires your home to be in your name or in a revocable trust. This trust, and many other irrevocable trusts, often give the Grantor of that trust the lifetime right to live in their home, pay their taxes, bills, mortgages, that sort of thing. The homeowner remains the homeowner, for all intents and purposes, except homestead exemption. The Grantor is responsible for the taxes, but does not get to take advantage of the tax benefits they normally have.
For the most part, this restriction went unnoticed by most towns and practitioners. That was, until, August, 2022 when Maine introduced its Property Tax Stabilization Program - LD 290. This law created a program that would allow Maine residents over the age of 65 to lock in their property tax bill at the current value, so long as they reapplied each year. This program was short-lived, however, as of July 6, 2023, the Maine Legislature repealed the program. That repeal goes into effect on October 11, 2023. The program was not without fault, and contained several concerning provisions. One significant impact of the law was that individual towns were required to process applications for this program. In administering this program, the towns looked to the statutes to see if individuals who applied, qualified. There were several requirements to qualify for the tax stabilization, which I will not get into here, but the important qualification is that the property on which you were attempting to "freeze” your taxes, had to qualify as your homestead. In looking at the definition of homestead, the restriction for revocable trusts was singled out, and as a result, many homeowners lost access to their exemptions for their properties placed in irrevocable trusts.
In response, several bills were introduced to the Maine Legislature, attempting to amend the definition of homestead in various ways to include the properties held in irrevocable trusts. In the early parts of this session, some bills made it past initial rounds of review, being forwarded to tax committees for further review, while others died immediately. Now, only one bill - LD 1335 is moving forward. This bill attempts to amend the the definition of homestead to include any properties placed in trust which benefit the applicant and that are occupied by the applicant as their primary residence. This amendment, if passed into law, should incorporate most irrevocable trusts, including the asset protection trust into the homestead exemption coverage.
