What is a Homestead Exemption?
A homestead exemption is a legal provision that helps shield a home from some creditors following the death of a homeowner spouse or the declaration of bankruptcy. The homestead tax exemption can also provide surviving spouses with ongoing property-tax relief, which is done on a graduated scale so that homes with lower assessed values benefit the most.
The homestead exemption is helpful since it's designed to provide both physical shelter and financial protection, which can block the forced sale of a primary residence. However, the homestead exemption does not prevent or stop a bank foreclosure if the homeowner defaults on their mortgage. Foreclosure is the process of a bank taking possession of a home due to failure to make timely mortgage payments.
The homestead tax exemption helps to shield a portion of a home's value from property taxes. Homeowners may need to apply for the benefit and should check with their local government.
How a Homestead Exemption Works
The homestead exemption provision is found in every state or territory, except for a few, including New Jersey and Pennsylvania. Yet how the exemption is applied, and how much protection it affords against creditors, varies by state. The homestead exemption is an automatic benefit in some states while in others, homeowners must file a claim with the state in order to receive it.
Since a "homestead" property is considered a person's primary residence, no exemptions can be claimed on other owned property, even residences. Further, if a surviving spouse moves his or her primary residence, they must re-file for the exemption.
A company called Asset Protection Planners has assembled a comprehensive listing of state regulations. While the company claims to keep the list updated, check with your local state government for current exemptions.
- ·A homestead exemption can help protect a home from creditors in the event of a spouse dying or a homeowner declaring bankruptcy.
- The provision can also provide surviving spouses with ongoing property-tax relief.
- Although most states have homestead exemptions, the rules and protection limits can vary.
Protection from Creditors Under the Exemption
The exemptions for homestead properties can vary from state-to-state. A few states, including Florida and Texas, afford unlimited financial protection against unsecured creditors for the home, although acreage limits may apply for the protected property. More common, though, is a limit for protection from creditors that ranges between $5,000 and $500,000, depending on the state, with many states in the $30,000 to $50,000 range.
However, the protection limits are not for the value of the home, but for the homeowner's equity in it—as in the value of the property minus the balance of the mortgage and other financial claims on it. If the equity held is less than the limit, the homeowner can't be forced to sell the property to benefit creditors. If a homestead's equity exceeds the limits, however, creditors may force the sale, although the homesteader may be allowed to keep a portion of the proceeds.
Importantly, too, the protection for the homestead property does not apply for secured creditors, such as the bank that holds the mortgage on the home. Instead, the homeowner is protected only from unsecured creditors who may come after the value of your home in order to satisfy claims against the homeowner's assets.
There's a twist when it comes to bankruptcy protection. Federal bankruptcy protection, in 2019, shields a home from sale if the owner's equity in it does not exceed $25,510. In most states, homeowners are forced to use the state limits, which are often more favorable anyway. However, about one in three states allow either the federal or applicable state limit to be used.
Among the upshots: Those who declare bankruptcy in New Jersey or Pennsylvania can get protection using the federal limits, in spite of the absence of a state homestead exemption in those states. Note, however, that the bankruptcy protection similarly protects only against unsecured creditors; it will not prevent a bank that holds a mortgage on the home from foreclosing on it.
Deducting the Homestead Exemption
A homestead tax or property tax is typically applied to homes based on the assessed value of the property by the local government tax assessor's office. The homestead tax can be a percentage of the property's value or a fixed amount.
The homestead tax exemption may offer ongoing reductions in property taxes depending on local state laws. These exemptions can help surviving spouses to remain in their home after their income has been reduced by the death of their partner.
Homestead tax exemptions usually offer a fixed discount on taxes, such as exempting the first $50,000 of the assessed value, with the remainder being taxed at the normal rate. For example, using a $50,000 homestead exemption, a home valued at $150,000 would be taxed on only $100,000 of assessed value, and a home valued at $75,000 would then be taxed on only $25,000.
Fixed homestead tax exemptions essentially turn a property tax into a progressive tax that is more favorable to those with more modest homes. In some areas, the exemption is paid for with a local or state (or equivalent unit) sales tax.