Homestead Exemption

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Main Findings

• The homestead exemption is a legal provision that can help homeowners lower their property taxes, protect their homes from creditors, or provide rights to their surviving spouse.
• The homestead exemption is available in most states in the United States but has different rules and benefits depending on where one lives.
• The homestead exemption can provide significant savings and security for homeowners who own and occupy their primary residence.

Homestead exemption is a legal provision that reduces the taxable value of a homeowner's primary residence for property tax purposes.

Homestead exemption can also protect a home from creditors in some states, especially in the event of bankruptcy or the death of a spouse. Homestead exemption only applies to one's primary residence and the eligibility criteria, benefits, and drawbacks vary by state.

Why homestead exemption?

Homestead exemption can provide homeowners with several advantages, such as:

• Lowering their property tax bill by shielding a portion of their home's value from taxation.
• Providing them with shelter and financial security by preventing the forced sale of their home to satisfy most debts, except mortgages, property taxes, or mechanic's liens.
• Giving them the right to vote on property tax increases for homeowners above the exemption threshold in some states.
• Offering them ongoing property tax relief as a surviving spouse in certain states.

Formula for homestead exemption

The formula for calculating the homestead exemption varies by state, but it generally involves either a flat reduction or a percentage reduction of the taxable value of a home. For example, in Florida, every homeowner who qualifies for the homestead exemption receives a $25,000 deduction from their home's assessed value.

An additional $25,000 deduction is available for homes with assessed values between $50,000 and $75,000. This means that a home assessed at $75,000 would only be taxed on $25,000 of its value.

In contrast, in Georgia, the homestead exemption is based on a percentage of the assessed value of a home, up to a certain limit.

For example, in Fulton County, homeowners can receive a 30% reduction of their home's assessed value, up to $30,000. This means that a home assessed at $100,000 would only be taxed on $70,000 of its value.

How to calculate homestead exemption

To calculate the homestead exemption for a specific home, one needs to know the following information:

• The assessed value of the home.
• The homestead exemption formula for the state and county where the home is located.
• The applicable homestead exemption amount or percentage for the homeowner's status (e.g., age, disability, veteran, etc.).

Using this information, one can apply the homestead exemption formula to the assessed value of the home and subtract the resulting amount from the original assessed value. The difference is the taxable value of the home after applying the homestead exemption.

For example, suppose a homeowner in Fulton County, Georgia has a home with an assessed value of $150,000. They are 65 years old and qualify for an additional $10,000 homestead exemption. The homestead exemption formula for Fulton County is 30% of the assessed value, up to $30,000. To calculate their homestead exemption, they would do the following:

• Apply the 30% formula to their assessed value: 0.3 x $150,000 = $45,000
• Compare the result to the $30,000 limit and choose the lower amount: min ($45,000, $30,000) = $30,000
• Add their additional $10,000 exemption: $30,000 + $10,000 = $40,000
• Subtract their total exemption from their assessed value: $150,000 - $40,000 = $110,000

The taxable value of their home after applying for the homestead exemption is $110,000.

Examples

To illustrate how the homestead exemption works, let's look at some examples from different states.

In Florida, a homeowner who qualifies for the homestead exemption can reduce the taxable value of their primary residence by $25,000 for the first $50,000 of assessed value, and by another $25,000 for the assessed value between $50,000 and $75,000. This means that a home with an assessed value of $100,000 would only be taxed on $50,000 of its value. If the property tax rate is 1%, the homeowner would save $500 per year in taxes.

In Texas, a homeowner who qualifies for the homestead exemption can reduce the taxable value of their primary residence by $25,000 for school district taxes, and by a percentage (usually 10% to 20%) for other local taxes. This means that a home with an appraised value of $200,000 would only be taxed on $175,000 of its value for school district taxes, and on $160,000 to $180,000 of its value for other local taxes. If the property tax rate is 2%, the homeowner would save between $400 and $800 per year in taxes.

In California, a homeowner who qualifies for the homestead exemption can protect up to $75,000 of their home equity from creditors (or up to $100,000 for married couples or up to $175,000 for seniors or disabled persons). This means that if a homeowner owes $50,000 on their mortgage and their home is worth $200,000, they have $150,000 of equity in their home. If they are sued by a creditor and lose the case, the creditor cannot force the sale of their home to collect the debt. However, if they owe $150,000 on their mortgage and their home is worth $200,000, they have only $50,000 of equity in their home. If they are sued by a creditor and lose the case, the creditor can force the sale of their home to collect the debt.

Limitations

The homestead exemption has some limitations that homeowners should be aware of. Some of these limitations are:

The homestead exemption only applies to one's primary residence.

Homeowners cannot claim the exemption on any other property they own, even if it is located in another state or country.

The homestead exemption does not protect homeowners from all types of creditors.

Homeowners still have to pay their mortgages, property taxes, homeowners association fees, and any liens or judgments that were placed on their property before they claim the exemption. The homestead exemption does not protect homeowners from federal tax liens or student loan debts.

The homestead exemption does not prevent or stop a foreclosure if the homeowner defaults on their mortgage.

The homestead exemption only protects homeowners from creditors who are trying to collect unsecured debts (such as credit card debts or medical bills). If the homeowner fails to make their mortgage payments or violates any other terms of their loan agreement, the lender can still foreclose on their property and sell it to recover the debt.

The homestead exemption varies by state.

Homeowners should check with their local government or a qualified attorney to find out how much protection they can get from the homestead exemption in their state. Some states have generous exemptions that cover most or all of the home's value, while others have modest exemptions that cover only a portion of the home's value.

Some states have flat exemptions that apply to all homeowners equally, while others have variable exemptions that depend on age, income, disability status, or veteran status.

Conclusion

The homestead exemption is a legal provision that can help homeowners lower their property taxes, protect their homes from creditors, or provide rights to their surviving spouse. The homestead exemption is available in most states in the United States but has different rules and benefits depending on where one lives.

Homeowners should research how the homestead exemption works in their state and apply for it if they qualify. The homestead exemption can provide significant savings and security for homeowners who own and occupy their primary residence.

References

• Investopdia (2023). Homestead Exemptions: Definition and How It Works, With State List. https://www.investopedia.com/terms/h/homestead-exemption.asp
• Wikipedia. Homestead exemption. https://en.wikipedia.org/wiki/Homestead_exemption
• Policygenius (2021). Homestead Exemption: What Is It & Who Qualifies? https://www.policygenius.com/life-insurance/homestead-exemption/

FAQ

A Homestead Exemption is a legal provision that helps homeowners reduce the taxes on their home. This exemption allows a portion of the home’s value to be excluded from property tax assessments.

Once a homeowner applies for and is granted a Homestead Exemption, a portion of the home’s assessed value is exempted from property taxes. The exact amount varies by jurisdiction.

Eligibility criteria can vary, but generally, the property must be the homeowner’s primary residence. Some jurisdictions may have additional requirements, such as age or income restrictions.

Yes, since property taxes are often escrowed into the mortgage payment, a lower property tax bill can reduce the overall mortgage payment.

While a Homestead Exemption can lower property taxes, it may also reduce the amount of money a homeowner can borrow against their home. Additionally, not all jurisdictions offer Homestead Exemptions, and the savings can vary widely.