What Is A Homestead Exemption?

As the name implies, homestead exemptions help homeowners who are in debt by offering exceptions to financial claims or obligations imposed on the home. There are two types of homestead exemption: The first protects owners who are at risk of losing their home to creditors. The other offers an exemption from state property taxes to reduce or even eliminate the amount owed. Here’s what to know about both kinds of homestead exemptions.

The homestead exemption from creditors

Simply put, the homestead exemption limits the extent to which creditors can claim your property. For example, if you’re a homeowner and filing for bankruptcy, the homestead exemption can be used to shield your home’s equity from creditors who want it as payment for outstanding obligations.

“The homestead exemption can be a powerful tool in helping common bankruptcy debtors protect and keep their home, while discharging debt,” says John Colwell, a California bankruptcy attorney and former president of the board of directors at the National Association of Consumer Bankruptcy Attorneys.

The homestead exemption can be a powerful tool in helping common bankruptcy debtors protect and keep their home.

— John Colwell
bankruptcy attorney

If you’re filing Chapter 13 bankruptcy, the homestead exemption impacts how much, if any, is to be paid to creditors, says John Rao, a senior attorney with the National Consumer Law Center. For homeowners filing Chapter 7 bankruptcy, “the homestead exemption determines whether they are able to keep their home — or whether they would even file bankruptcy, since they are not likely to file if they have non-exempt equity,” Rao says.

It’s important to note that homestead exemptions don’t apply against certain types of creditors. These can include mortgage lenders foreclosing because you’re delinquent or in default of repaying your loan, or contractors who’ve filed a mechanic’s lien because you haven’t paid them for working on your property.

How much is the homestead exemption good for?

While all U.S. states allow some form of bankruptcy homestead exemption, the exact level it allows varies. Some states allow full protection of up to 100 percent of your home’s value, while some set a fixed dollar amount, and some even allow married couples double the amount. Florida is one of the most generous states, allowing an unlimited amount to be protected against creditors in a bankruptcy filing (as long as the property meets certain criteria for length of ownership and lot size).

There are federal homestead exemptions that may apply in some bankruptcy cases, as well. Pennsylvania and New Jersey do not offer state homestead exemptions against creditor claims but do allow taxpayers to take federal homestead exemptions instead. A real estate attorney can help you leverage the appropriate exemption for your specific situation.

The homestead exemption from property taxes

There are also property tax homestead exemptions, also known as “homestead tax exemptions,” that can help reduce your tax bill. Think of them as the property tax equivalent of the standard deduction for income taxes: The exemption allows you to shelter an eligible portion of your home’s assessed value from property taxes, just as the standard deduction allows you to shelter a part of your earnings from income tax.

Typically, to leverage this exemption, the home in question must be your primary residence. There may also be a limit on the value of a home that can qualify for an exemption.

For example, say a homeowner had her primary home assessed at $225,000, and she qualified for a $25,000 homestead exemption. Her property taxes for the residence would be calculated as if it were assessed at $200,000, effectively lowering her tax bill.

Who is eligible for a homestead exemption?

Typically, to be eligible for either type of homestead tax exemption, you must actually occupy the home in question, and it must be considered your legal residence for all purposes. Eligibility varies by state, but you will likely be eligible if:

• your income is low
• you are a senior citizen
• you have a disability
• you are a veteran, or the surviving spouse of a veteran

If you’ve relocated temporarily — for example, if you’re deployed for military service or receiving treatment in a medical facility — and haven’t established a permanent residence elsewhere, you can still claim the homestead exemption in some states.

If you’re filing for bankruptcy, an experienced bankruptcy lawyer will be able to help you assess whether the exemption will allow you to keep your home. The question of whether your home would be exempt should be one of the first topics you discuss.

For specifics on homestead property tax exemptions in your state, start with the website of your state comptroller or tax office. A professional tax preparer or real estate attorney can also provide guidance.

FAQs

• How do I apply for a homestead exemption?
  

  Details on homestead tax exemptions are usually available on your county or local tax assessor’s website. Some states require you to fill out an application (often available online). Make sure to note your state’s application deadlines. You’ll likely be required to prove that you qualify for the exemption — which can mean providing copies of your driver’s license or military discharge papers, for example, as well as annual tax returns. The guidelines for when to apply — when you first buy the house? only if you’re already in financial distress? — will vary by state, so talk to a tax professional or real estate attorney in your state.

• What is the deadline for filing a homestead exemption application?
  

  For the typical property tax homestead exemption, applications are generally due in the spring of the relevant tax year. The deadline is often close to income-tax day (April 15) or the due date of your first quarter property tax payment. You must have been occupying the home since January 1 of that year. Many states also allow you to make a late application for several months after the official deadline.

• Can I get a homestead exemption for a vacation home or second home?
  

  No, homestead exemptions are only available for primary residences. You must be actively residing in the home to be eligible.