A homestead exemption is a provision that helps certain taxpayers reduce their property taxes (and protect the homestead from creditors) following the declaration of bankruptcy or death of a spouse. The exemption lowers the taxable value of a property by a certain amount. This is done based on a graduated scale. That means that lower valued homes receive the highest tax relief. It also allows homeowners to exclude a part of their home value for tax assessment. As such, the property tax due is calculated on the net home value after excluding the exemption amount.
What Constitutes a Homestead?
Each state has different rules for homestead exemption. Unfortunately, they use different criteria to determine exactly what constitutes a homestead. They also have different rules for the amount of exemption that homeowners can get. You’ll need to look up the state-specific rules for where you live.
Generally, the homestead must be the principal residence. As such, it can be a free-standing house, condominium, or manufactured home located on land that you owns or lease. Some states put a limit of the acreage size of the land. For example, homeowners in Texas can claim exemption on up to 10 acres of land.
How Does Homestead Exemption Work?
The homestead exemption law protects a portion of the home value from property taxes. This exemption applies to primary residences only. Other properties, such as vacation homes or commercial and investment properties, do not qualify for the exemption. To qualify for the exemption, you must live in the home and use the land for purposes related to residential use.
There are a couple different methods of calculating a homestead exemption. Here are two that states commonly use.
1. Flat-Dollar Exemption
This method of homestead exemption reduces the home’s taxable value by a specific amount. As a result, it has a greater impact on people with inexpensive homes.
For example, let’s assume a state has a homestead exemption of $25,000. The assessed value of your home is $100,000. That means that the taxable value of the property would be $75,000, or a potential saving of up to 25%. Using a property tax rate of one percent, the homeowner in this example would be required to pay $750 in taxes.
2. Percentage Exemption
The percentage homestead exemption uses a specific tax rate to reduce the taxable value of a home. This method has a bigger impact on homes with a higher value.
For example, let’s assume a state allows a 20 percent homestead exemption. The assessed home value is $500,000. That means the taxable value of the property would drop to $400,000. At a one percent property tax rate, the homeowner will pay $4,000 in taxes. In this example, they would save $1,000 on their property tax — more than the $750 saved in our flat-dollar example.
Who is Eligible for Homestead Exemptions?
The basic requirement to qualify for the homestead exemption is that the home must be your primary residence and you are the person responsible for making mortgage payments. Also, you must be able to prove that you resided in the home starting January 1 of the tax year.
Generally, homestead exemptions are available in a majority of the states. Some states offer this exemption to all homeowners, while other states restrict the exemptions to people in certain categories, such as senior citizens, veterans, disabled first responders, and people with disabilities. Other requirements may include age and income.
Another category of people who may qualify for homestead exemption includes an unmarried surviving spouse of a disabled veteran, firefighter, or military service members. If the surviving spouse moves the primary residence to another property, they must resubmit the homestead exemption.
How to File a Homestead Exemption
To claim a homestead exemption, you must apply for the exemption through your state. You can get the homestead exemption application form in your county’s tax office or download the forms on the state tax website. You may be required to renew the exemption every year to claim the tax benefit.
Depending on the state, you must apply for homestead exemption by March or April of the tax year in which you are claiming an exemption. The deadline is often close to the IRS tax deadline or the first quarter of the property tax due date. Check with your county’s tax office to know the deadline for tax exemptions.
When filing for a homestead exemption, you’ll need to include the appropriate paperwork to prove your claim is valid. If your documents aren’t all accounted for, your exemption could be delayed or even rejected entirely. Don’t make extra work for yourself by submitting incomplete documentation.
Some of the common filing requirements include:
- Proof of residency;
- State or federal disability paperwork, and;
- Birth certificate, license, or other government issues identification.
Homestead Protection and Creditor Protection
Apart from reducing property taxes, the homestead exemption also provides home protection from creditors. If you declare bankruptcy, the unsecured creditors you owe money cannot force an auction of the home to recover the debt.
Some states offer unlimited financial protection to homeowners. Others have specific limits that may range from $5,000 to $500,000. The protection limits only apply to your equity value on the home — that is, the property value less the outstanding mortgage balance (and other financial dues attached to the property). If your equity falls below the protection limit, the creditor is barred from selling the property.
However, the homestead protection does not apply to secured creditors. If you have defaulted on your mortgage or had a lien on unpaid taxes, a homestead exemption does not protect your home from a forced sale. The mortgage lender can initiate foreclosure to recover the unpaid debt.
Protection of Spouses Under the Homestead Exemption
The homestead exemption law is included as part of the probate code to offer protection to surviving spouses. After a partner dies, the law allows the surviving spouse to continue living in the homestead as their primary residence. This holds even in situations where the title of the property changes hands to another person. The surviving spouse can continue occupying the house until they pass on or when the youngest child attains adult age.
In some states, the homestead exemption may require the home to be excluded in probate proceedings or in valuing the estate of a deceased person. You may need to consult with a local attorney to know the exact laws in your state.
FAQs about Homestead Exemption
How Do You Get a Homestead Exemption?
To qualify for a homestead exemption, you must be an individual and use the home as your principal residence starting January 1 of the tax year in which you want to qualify. You must also meet the state’s eligibility requirements for homestead exemption.
Does Homestead Exemption Reduce Property Taxes?
The homestead exemption excludes part of your home from taxable income, hence lowering the taxes payable. The exemption can be a fixed-dollar value or a percentage exemption based on the home value. It’s unlikely that a homestead exemption will eliminate your property tax lability entirely.
What Is the Deadline for Homestead Exemptions?
Depending on the state, you must submit the homestead exemption application before March or April of the tax year you are applying. Check with the county’s tax office to know the state’s deadline for homestead exemption.
The Bottom Line
A homestead exemption can be a valuable tool to reduce the amount of property tax you need to pay. However, it only applies in specific situations. The most common situations are if you need to declare bankruptcy or your spouse passes away. The laws surrounding homestead exemptions vary a lot from state-to-state. If you’re considering applying for one, make sure to check your local regulations. If necessary, consult a legal professional (like a tax attorney) to make sure you’re eligible.