A homestead tax exemption is a special provision in a state’s tax laws that helps a homeowner to reduce the property taxes they must pay.
These rules vary from state to state but checking the regulations in your state can mean saving money on your annual tax bill.
Keep reading for the top things you must know about how the homestead tax exemption works.
1. How do property taxes work?
Before you can understand the homestead tax exemption, you must first understand how property taxes work.
Property taxes can be levied by the state or local government (or both).
Your property tax rate is an ad valorem tax, which means it is based on a certain percentage of the assessed/market value of your home.
You may also find property taxes under the term “millage tax” or “mill levy.”
Your millage rate is the rate of your local and state government uses to calculate your property taxes.
To calculate this, your local government multiples the millage rate (local tax rate) by the assessed value of the home.
This value is then divided by 100, and this will be your property tax for the year.
2. What is the homestead tax exemption?
The homestead tax exemption aims to reduce the amount of property tax that property owners pay on their principal place of residence.
The exemption can work one of three ways:
By excluding a portion of your home’s value from taxation
By limiting the amount of property taxes a homeowner will be assessed (known as a floating-inflation exemption in many jurisdictions)
By exempting certain categories of homeowners from their property tax obligations
This legal provision is also sometimes used to shield a home from creditors following the death of a homeowner’s spouse or the declaration of bankruptcy.
It may also provide surviving spouses with ongoing property tax relief on a graduated scale.
This is so that homes with lower assessed values benefit the most.
3. What is the purpose of the homestead tax exemption?
The homestead exemption is designed to provide both physical shelter and financial protection.
It can block the forced sale of a primary residence in the cases of spousal death or bankruptcy.
However, this exemption doesn’t prevent or stop bank foreclosure if the homeowner defaults on their mortgage.
If this occurs, then the bank will still take possession of the home due to the homeowner’s inability to make timely mortgage payments.
4. How does the homestead tax exemption work?
Some version of the homestead tax exemption is found in almost every state or territory.
The exemptions to this rule include New Jersey or Pennsylvania.
Additionally, Massachusetts and Rhode Island had their exemption limit set at $500,000.
The way that this exemption is applied and how much protection it affords against creditors also varies by state.
Instead of having homestead tax exemptions, some states have general homestead laws, which protect surviving spouses from creditors.
In some states, the homestead tax exemption is an automatic benefit.
In other states, homeowners must file a claim with the state to receive it.
Because a homestead property is normally considered a person’s primary residence, no exemptions can be claimed on other property they own (even residences).
Additionally, if a surviving spouse moves their primary residence, then they must re-file for the exemption.
5. Do creditors have any protections under the homestead tax exemption?
Homestead tax exemptions vary from state to state.
However, some states like Florida and Texas have unlimited financial protection against unsecured creditors for the home (although some acreage limits may apply for protected property).
Additionally, there are some limits for protection from creditors that range from $5,000 to $500,000 depending on the state.
These protection limits are not for the value of the home but rather for the homeowner’s equity in it.
Equity is the value of the property minus the balance of the mortgage and other financial claims on the property.
If the equity held is less than the limit, then 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.
That said, the homesteader may be allowed to keep a portion of the proceeds in this case.
Note that this protection of the homestead property does not apply to secured creditors.
Secured creditors include a bank that holds the mortgage on the home.
Instead, the homeowner is protected only from unsecured creditors who can come after the home’s value to satisfy claims against the homeowner’s assets.
One exception is when it comes to bankruptcy protection.
If a bankruptcy case was filed after April 1, 2019, federal bankruptcy law shields a home from sales if the owner’s equity doesn’t exceed $25,150.
If cases were brought before this date, then the exemption is $23,675.
In most states, homeowners must use the more favorable state limits.
That said, 1 in 3 states allow either the federal or applicable state limit to be used.
6. How do you deduct the homestead tax exemption?
A homestead tax (or property tax) is normally applied to homes based on their assessed value.
The local government tax assessor’s office will provide this value to you.
The homestead is a percentage of the property’s value or a fixed amount.
Depending on your state’s laws, the homestead tax exemptions may offer ongoing reductions in property taxes.
These exemptions are helpful to spouses who remain in their homes after their income has been significantly reduced following the death of their partner.
Homestead tax exemptions typically offer a fixed discount on taxes and turn property tax into a progressive tax that is more favorable to those with modest homes.
In some areas, the exemption is paid for with a local or state sales tax.
Here is an example of how the tax exemption works:
Your home’s value: $150,000
Eligible exemption: $50,000
You would only be taxed on $100,000 of assessed value instead of $150,000.
If your home was valued at $75,000, then you’d only be taxed on $25,000.
7. How do you apply for a homestead tax exemption?
Applying for a homestead tax exemption will vary depending on where you live.
For more information on how to apply, go directly to your county or local tax assessor website.
Some states will require you to fill out an application.
Pay attention to our state’s application deadlines.
Most applications are due by March or April of the year you intend to claim the exemption.
However, it could be as early as December 31 of the year prior.
You’ll also need documentation that shows your age or disability.
This can include the following:
A birth certificate or government-issued identification (such as a driver’s license)
Disability paperwork from a state or federal agency
An affidavit from your physician
Note: Some sites are fraudulent and will require payment to fill out an application.
Your county or local tax assessor will NOT require you to pay a fee to fill out an application for homestead tax exemption.
8. Who is eligible for a homestead tax exemption?
Homestead tax exemption eligibility varies by state.
Here are the most common criteria for eligibility:
People with disabilities
Disabled former law enforcement and first responders
Veteran (though often restricted to disabled veterans)
You can combine exemptions if you fall into more than one category.
Although, there may be a limit on the value of a home that can qualify for an exemption.
If this is the case where you live, check with your local tax assessor.
9. How does the homestead exemption work in Florida?
In Florida, individuals must occupy the property as their permanent residence prior to January 1 of the year that they’re applying for a homestead tax exemption in order to qualify.
The applicant must also be a U.S. citizen or a permanent U.S. resident as well as a Florida resident.
Homestead exemption applicants cannot claim or receive any type of tax exemption on any other property in the U.S.
An exemption application must be completed and submitted to the property appraiser in the country where the property is located by the statutory deadline of March 1.
The Florida homestead tax exemption is up to $50,000.
The first $25,000 applies to all property taxes, including school district taxes.
An additional exemption up to $25,000 applies to the assessed value between $50,000 and $75,000 but only to non-school taxes.
Note: please be sure to check the Florida Department of Revenue website to verify the details of the Florida homestead tax exemption.
10. What’s an example of a homestead exemption?
Assessed value of your home: $300,000
Property tax rate: 1%
Property tax bill: $3,000
If you were eligible for a homestead tax exemption of $50,000, then the taxable value of your home would drop to $250,000 (instead of $300,000).
This means your tax bill would drop to $2,500 and save you $500.
11. How else can you lower your mortgage tax bill?
In general, owning a home offers you numerous tax benefits.
If your state doesn’t provide a homestead exemption or if you’re looking for additional avenues to save money, then you can try the following methods to reduce your property tax bill.
Appeal your tax assessment
Between 30 to 60 percent of taxable properties in the U.S. are overvalued.
If you’re not sure your valuation is accurate, file an appeal with your local tax authority to appeal your assessment.
Deduct your mortgage interest payments
Did you know you’re allowed to deduct interest paid on up to $750,000 in home loans on your federal taxes?
This includes the mortgage on your primary residence and a home equity loan or a line of credit sued to buy, build or improve your primary residence or a second home.
Deduct the value of your home office
If you’re self-employed, you may be able to deduct $5 per square foot of your home office on your taxes.
The homestead tax exemption is an exemption on property taxes from the home.
It protects the value of residents’ homes from property taxes, creditors, and circumstances that arise from the death of a homeowner’s spouse.
In many cases, it ensures that a surviving spouse has a continued place to shelter.
That said, they cannot default on their mortgage, or the bank can still foreclose on their home.
Additionally, this exemption applies onto to the primary residence and cannot be claimed for another property elsewhere.
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Disclaimer: we are not lawyers, accountants or financial advisors and the information in this article is for informational purposes only. This article is based on our own research and experience and we do our best to keep it accurate and up-to-date, but it may contain errors. Please be sure to consult a legal or financial professional before making any investment decisions.