Homestead Tax Exemption: What is it, and How to use it? 

What is a Homestead Tax Exemption?

The homestead tax exemption is a legal document that protects a homeowner’s home from some creditors. This is usually after the death of the homeowner’s spouse or the filing of a bankruptcy petition. This tax exemption is perfect for those looking to live off the grid.

The homestead tax exemption is beneficial because it will give both physical shelter and financial security, perhaps preventing the forced sale of a primary dwelling. However, if the homeowner defaults on their mortgage, the homestead tax exemption does not prevent or stop a bank foreclosure. Foreclosure occurs when a bank takes homeownership due to the nonpayment of mortgage payments on time. The homestead tax exemption can also provide continuous property tax relief to surviving spouses on a graded scale, with residences with lower assessed values benefiting the most.

Here’s some more information on finding the perfect homestead.

How Does the Homestead Tax Exemption Work?

Except for New Jersey and Pennsylvania, every state or territory has a variant of the homestead tax exemption provision. 3 However, how the exemption is used and the amount of protection it provides against creditors differs by state. In some states, the homestead tax exemption is automatic, whereas, in others, homeowners must file a claim with the state to receive it.

Because a person’s primary dwelling is considered a homestead property, no exemptions can be claimed on other owned property, including residences. In addition, if the surviving spouse changes their primary address, they must re-apply for the exemption.

How Does the Homestead Tax Exemption Protect You? 

The exemptions for homestead properties differ by state. Only a few states, notably Florida and Texas, provide limitless financial protection from unsecured creditors for the residence; however, acreage limits may apply. 4 More usual is a creditor protection cap ranging from $5,000 to $500,000. This depends on the state, though, as many are in the $30,000 to $50,000 range. 

However, the limits of protection are not for the home’s value but the homeowner’s equity in it—the property’s value less the balance of the mortgage and other financial claims on it. If the homeowner’s equity is less than the limit, they cannot be forced to sell the property to benefit creditors. If the equity in a homestead exceeds the restrictions, creditors may force the sale, albeit the homesteader could be allowed to save a bit of the proceeds.

Furthermore, homestead property protection does not apply to secured creditors, such as the bank that holds the mortgage on the home. Instead, the homeowner is only shielded from unsecured creditors who may seek the home’s value to pay claims against the homeowner’s assets.

Protection From Bankruptcy

When it comes to bankruptcy protection, there is a twist. For cases filed after April 1, 2019, federal bankruptcy law protects a house from sale if the owner’s equity is less than $25,150. The homestead tax exemption is $23,675.67 for cases filed before that date. Most states force homeowners to use the state limits, which are frequently more beneficial. However, around one-third of the states permit the use of either the federal or applicable state limit.

Furthermore, secured creditors, such as the bank that holds the mortgage on the home, are not covered by homestead property protection. Instead, the homeowner is only protected from unsecured creditors who may seek the home’s worth to satisfy claims against the homeowner’s assets.

Deduct the Homestead Tax Exemption 

The local government tax assessor’s office normally applies a homestead tax or property tax to residences depending on the property’s assessed value. The homestead tax might be a fixed amount or a percentage of the property’s worth.

The homestead tax exemption may provide ongoing property tax reductions depending on local state regulations. These exemptions can assist surviving spouses in remaining in their homes when their income has been decreased due to their partner’s death.

Homestead tax exemptions often provide a predetermined tax discount, such as exempting the first $50,000 of assessed value, with the balance taxed at the regular rate. Using a $50,000 homestead tax exemption, a property worth $150,000 would be taxed on only $100,000 of assessed value, while a home worth $75,000 would be taxed on only $25,000.

Fixed homestead tax exemptions effectively convert a property tax into a progressive tax that benefits individuals with smaller dwellings. The exemption is sometimes compensated for with a local or state (or comparable unit) sales tax. 9

Here’s a good example:

Assume your home’s assessed value is $300,000 and your property tax rate is 1%. Your property tax bill would be $3,000. However, if you were eligible for a $50,000 homestead tax exemption, the taxable value of your home would be reduced to $250,000, lowering your tax obligation to $2,500.

FAQ About the Homestead Tax Exemption

How can you apply for the homestead tax exemption?

For further information on homestead tax exemptions, visit the website of your county or municipal tax assessor. You may be required to fill out an application in some states. Make certain that you meet your state’s application deadlines.

Also, remember that certain websites may be fraudulent and may require payment to complete an application. To fill out your application for homestead tax exemption, your county or municipal tax assessor will not charge you a fee.

Who is eligible for a homestead tax exemption? 

Homestead tax exemption eligibility varies by state. If your income is on the lower side, you are a senior, you have a disability, or you are a veteran, you may be eligible. If you fall into more than one category, you can combine your exemptions. There may also be a cap on how much a residence might be worth to qualify for an exemption. Consult your local tax assessor.

What states have homestead tax exemptions? 

Homestead tax exemptions are available in the majority of states. Homestead tax exemptions are not available in New Jersey or Pennsylvania, although Massachusetts and Rhode Island have placed the exemption ceiling at $500,000. Instead, some jurisdictions have universal homestead laws, such as those protecting surviving spouses from creditors.

How to apply for a homestead tax exemption in Florida? 

Individuals must occupy the property as their permanent residence before January 1 of the year they are filing to qualify for the homestead tax exemption in Florida. An applicant must be a U.S. citizen or a permanent resident of the United States and a resident of Florida. Applicants may not claim or receive tax breaks on any other property in the United States. By the deadline of March, an exemption application must be completed and submitted to the property appraiser in the county where the property is located.

Final Thoughts on Homestead Tax Exemption 

The homestead exemption exempts a residence from property taxes. The exemption also shields the value of residents’ homes from property taxes, creditors, and events such as the death of the homeowner’s spouse. The homestead tax exemption ensures that a surviving spouse has a place to live. The exemption only applies to a primary dwelling and cannot be used to claim another property. Homestead protection is automatic in certain areas. In others, landowners must file a claim for homestead tax exemption with the state.