Homestead Exemption: Definition & Overview

KEY TAKEAWAYS

• A homestead exemption lowers the amount of state property taxes owed by homeowners.
• In the event of a spouse’s passing or a homeowner filing for bankruptcy, the exemption can aid in defending a home from creditors.
• In some states, the clause offers continuing property tax relief to surviving eligible spouses.
• The only residence that is excluded is the owner’s principal dwelling.
• Homestead exemptions are available in most states. However, there are different restrictions and levels of protection.

What Is the Homestead Exemption?

The homestead exemption is a strategy for homeowners to reduce their property taxes. In addition, most states have a legal provision that helps protect a home from some creditors if  a homeowner’s spouse passes away or they file for bankruptcy. Survivor spouses may receive continuous property tax reduction because of the homestead tax exemption, which is applied on a tiered basis to favor properties with lower assessed values.

How Homestead Exemption Works

Some homestead exemptions are calculated as a flat value reduction of your entire home’s taxable value. A percentage is used in other cases to determine the homestead property tax exemption. The latter is a better option for persons with high-value properties, but the former provides a larger discount for lower-valued residences.

With a few exceptions, including New Jersey and Pennsylvania, every state and every territory has a variant of the homestead exemption provision.

However, each state has its own rules for how the exemption is used and how much protection it offers against creditors. In certain areas, homeowners automatically qualify for the homestead exemption, while in others, they must submit a claim to the state in order to do so.

Types of Homestead Exemptions

Some states have more than one type of homestead exemption. Let’s take a look at Texas as an example. 

According to the Texas Constitution, a person cannot lose their homestead rights unless they die, abandon their land, sell it, or have a claim against it foreclosed. 

In Texas, there are two types of homesteads:

• Urban and; 
• Rural 

Texas homeowners typically apply for homestead exemption to help reduce their taxes. Applications for homestead exemption are filed with the appraisal district in which the property is located. The general application deadline is before May 1. Homeowners must occupy the property on January 1 of the given tax year in order to be eligible for the homestead exemption.

What Are the Advantages of Homestead?

The homestead exemption is advantageous because it is intended to offer both material shelter and financial security, preventing the sale of a primary dwelling under duress. However, if the homeowner defaults on their mortgage, the homestead exemption does not stop or prevent a bank foreclosure. When a homeowner doesn’t make their mortgage payments on time, a bank will foreclose on their home and seize possession of it.

What Are the Disadvantages of a Homestead?

There are also some disadvantages of a homestead. These include: 

• Homestead is not applicable in relation to Medicaid protection or state laws that enable Medicaid-related confiscation.
• Probate or estate taxes are not avoided by homestead.
• If a homeowner doesn’t make their mortgage payments, their bank can still foreclose on their home.
• Some states choose not to participate in federal bankruptcy protection.
• Homesteading can only apply to your main dwelling. It does not apply to any rented properties or second homes.

How Do I Apply for a Homestead Exemption?

To apply for a homestead exemption, it is recommended that you directly access the website of your county or local tax assessor. Some states demand that you submit an application, which is normally available online. Ensure that you adhere to the application dates set forth by your state.

It’s important to remember that you won’t have to pay a fee to submit an application for a homestead tax exemption to your county or municipal tax assessor. 

You might be eligible to apply for a homestead property tax exemption if you own a primary residence and want to lower the total amount of property taxes owed on that residence. You might not even need to belong to a certain group of residents, depending on where you live, as some governments actually grant the exemption to every homeowner. But the majority  frequently demand that you be:

• A person with a disability
• An elderly person
• A veteran
• A disabled member of the police or first responders

Example of a Homestead Exemption

Let’s say that your home has an assessed value of $250,000. In this example, your property tax rate is 1% meaning your property tax bill would equal $2,500. However, let’s now say that you were eligible to receive a homestead tax exemption that totals $20,000. 

This would mean that the taxable value of your house would drop down to $230,000. In turn, this would mean that your tax bill would be reduced by $200 down to $2,300. 

Summary

The homestead exemption exempts a homeowner from paying property taxes. The exemption also shields homeowners’ homes’ value from creditors, property taxes, and situations brought on by the death of a homeowner’s spouse. Homestead exemption guarantees housing for a surviving spouse. 

This exemption is only applicable to a primary dwelling. Meaning it cannot be used to offset the cost of any other property. Homestead protection is a given in certain areas. In others, landowners must submit a homestead exemption application to the state.

Written by Sandra Habiger, CPA

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.

Written by Sandra Habiger, CPA

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.