Understanding the Homestead Exemption

In this article...
  • Save money on your property tax bills using the homestead exemption. Learn how the exemption works, how to apply and what other protections it offers.

When you purchase a property, you want to keep your expenses as low as possible, including your tax liabilities. For eligible homeowners, the homestead exemption can reduce property tax bills. The exemption may also be able to protect your home if you experience financial difficulties. 

What Is the Homestead Exemption?

The homestead exemption is a legal provision that minimizes property tax bills and helps shield the property from creditors if the homeowner declares bankruptcy or their spouse dies. 

When it comes to property taxes, the exemption is offered as either a flat rate or percentage reduction on the value of your home. The protection from creditors works differently in different jurisdictions. In the most general terms, it means you won’t have to sell your property to pay off unsecured creditors. 

The protection is for the homeowner's equity in the home, not the value of the home. Most states set a limit for the protection. If your equity is under that limit, you can't be forced to sell for the benefit of your creditors. However, if your equity is over the limit, you may need to sell, although you may be able to keep some of the proceeds. 

This can help you keep your home in the event of bankruptcy, which means you'll still have shelter if the worst happens. It can also help a person keep their shelter after their spouse dies, even if their income is reduced or there are expenses associated with the death.

This protection doesn't apply to secured creditors, so your bank can still foreclose if you don't pay the mortgage. As each state has different rules, it's important to get advice regarding the property tax laws in your state. 

Eligibility Criteria

The only eligibility criteria that remain the same across all states is that the property must be your principal place of residence. If you don't live in the house, the property isn't eligible for the homestead exemption. This means the homestead exemption doesn't apply to investment or holiday properties.

Some states offer the homestead exemption to every homeowner, but in most states, this
tax relief is targeted toward certain sections of the population. It's common for the exemption to be available to older adults, veterans and people with disabilities. In certain situations, the spouse of a senior or veteran will remain eligible for the exemption when their spouse dies, even if they don't meet the criteria.

In some states, the exemption is only available for properties below a certain value. This effectively puts an asset limit on the exemption. 

How Much Can I Save?

The exact amount of deduction varies by state, but it can be helpful to know how each type of exemption works. 

For states that offer a flat deduction, that amount comes off the value of the property. For example, if your home is worth $150,000, and the state exempts $50,000 from each eligible property, you only pay tax on $100,000. This is generally better for people with lower-value homes. 

States that use a percentage deduction generally lower the home's value for tax purposes. For example, if the state exempts the first 20% of the value of your $150,000 home, you deduct $30,000 from the value, which means you'd only pay tax on $120,000. This structure tends to work better for people with higher-value properties.

Which States Offer Homestead Exemptions?

All states offer some type of property tax relief to certain residents. This may come under different names, such as a property tax deduction, senior valuation protection or senior school property tax relief. 

Pennsylvania and New Jersey don't offer any protection from creditors through a homestead exemption. However, people who declare bankruptcy in those states may be eligible for protection using the federal limits. 

How Do I Apply?

In some states, the homestead exemption is automatically applied when you meet the requirements, while in others, you'll have to complete an application form. As county and local tax assessors administer property tax, you should call them or check their website to find out about the application process. Always go to the official government website, as there are fraudulent sites that ask for money to file applications. There are no fees involved in completing a homestead exemption application.

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