Any homeowner can suffer a major loss, like the loss of a spouse or other financial setback, and risk losing their home as a result.
That’s where the homestead exemption can save the day – and the house.
A homestead exemption is a legal mandate that shields a homeowner from the loss of his or her home, usually due to the death of a home-owning spouse, a debilitating illness or if the homeowner slides into bankruptcy. The age of the homeowner may also come into play, as well.
A homestead exemption can also protect a homeowner in distress from onerous property taxes, with built-in mechanisms that either reduce those taxes or remove them altogether.
By and large, a homestead exemption offers legal protection from unsecured lenders and creditors who might otherwise foreclose on a residential property and remove the homeowners from the home. Under most state statutes, the homestead exemption only allows secured lenders or creditors, like a mortgage holder, taxing agency or mechanic’s lien, to force a homeowner to pay up and/or remove them from a home.
There are specific areas of what can and cannot be protected when seeking a homestead exemption. First and foremost is this – homestead exemptions only shield a homeowner’s equity in the home (i.e., the amount of money accumulated so far in the home). It does not protect a home based on its value.
Homestead Exemption – A Background
Homestead exemptions don't exist in every U.S. state.
According to data from the Center on Budget & Policy Priorities, 21 U.S. states offer the exemptions or at least target home tax credits to elderly Americans. In five U.S. states, local governments are allowed to offer homestead exemptions or some form of homeowner financial protection in the event of a spousal death or personal bankruptcy.
In that regard, the homestead exemption is basically a legal statute made available by U.S. states – with one exception.
The U.S. government has established formal bankruptcy exemption amount of $23,675 or $47,350 for married couples who file jointly. That exemption range is changed on a regular basis by the government.
The statute’s history has its origins in Spanish law on homeownership dating back centuries. Some U.S. states model their homestead exemption laws on 1800s home ownership laws, meaning the backbone of many state homestead exemption statutes date back almost two centuries.
So it’s not a surprise that the primary factor in homestead laws is how much they vary on a state-to-state basis. Some states emphasize building their property exemption laws around the protection of a home, up to a specific value of that home.
For example, California offers a homestead exemption of up to $75,000 for single homeowners, up to $100,000 for married spouses, and up to $175,000 for seniors over the age of 65, or those homeowners who may be physically or mentally disabled.
Other states have other exemptions. Texas provides legal property exemptions with no financial limitations and protects 10 acres of an urban or suburban property (municipality rules apply) and protects 100 acres for homes in rural areas.
Still other states meet in the middle. Take Nevada, which limits sales equity on a home to $605,000 (still well above the state’s median home sales price of $302,000, with some exceptions.) Going down to the lower end of homestead exemption levels are New Mexico and Alaska, which limit their homestead exemptions to $60,000 and $54,000, respectively.
Note that in most states, the homestead exemptions isn’t linked to the current rate of inflation, which often dilutes the “real” value of property value exemptions for health, death of a spouse, or personal bankruptcy.
Property Tax Exemptions a Benefit, Too
Most homestead exemptions are tied to a specific asset value of a home, thus protecting assets either in a home sale or home protection scenario in the event of a spousal death, health issues, or personal financial situation.
Yet in many instances, property tax exemptions, full or partial, are another tool states use to protect homeowners.
The idea is to issue property tax exemptions to qualified homeowners (again, those owners suffering a disability, loss of a spouse, or personal bankruptcy), thus saving them money on potentially high property taxes. Property tax exemptions may include traditional property taxes levied on a residence or it could mean technically external local taxes, like for public building construction or preservation/restoration of local land.
In general, a homeowner can qualify for a property tax exemption under the following scenarios:
- The individual owned the home by the end of the year prior to taxes being due.
- The individual lives in the home (i.e., it’s a primary residence.)
- The individual has a negative financial issues that would otherwise lead them to leaving the home.
- The individual is at least 61 years old the year he or she applied for the exemption, or is suffering from a disability, or is a military veteran who was disabled in the course of duty.
Once a homeowner qualifies for a property tax exemption, that exemption is final – the homeowner no longer has to pay the property taxes exempted – ever. Additionally, a property tax exemption means no tax liens levied on the property, even as it lowers the homeowner’s tax burden on the property.
A bonus: Once you have the property tax exemption locked in, property taxes on the house can’t be levied against the rising value of your home. Your home’s value is essentially frozen under a property tax exemption, and the asset level it’s valued at will be the benchmark for any property taxes assessed.
A Snapshot Example of a Homestead Exemption
Here’s how a homestead exemption might work, using the state of Texas as an example.
The Landrys own a small ranch property far away from any big towns or cities. The property is valued at $250,000. By Texas law, the top local property tax exemption allowable is $25,000. As Mr. Landry is over age 65, the family earns an additional $3,000 local property tax exemption.
Thus the exemption calculation goes as follows:
$25,000 + $3,000 = $28,000
$250,000 (value of the home) - $28,000 = $222,000.
As far as local property taxes go, the Landrys' only own property taxes based on the $222,000 figure, not the $250,000 figure.
How Can I Get a Homestead Exemption?
Again, depending on the state where the homeowner resides, a homestead exemption may be automatically triggered if a homeowner qualifies. Otherwise, a homeowner will likely have to apply for an exemption using state or local application guidelines, which can vary significantly.
(This helpful guide to U.S. homestead exemptions in a state-by-state basis can be a big help to find out what your state offers and how to proceed.)
Contact your state’s tax office or secretary of state’s office for specific instructions on how to apply for a homestead exemption.
When you do apply expect to have the following information on hand:
- Documented proof you own the home. Copy of the property’s deed will suffice, as will a tax bill and a mortgage bill. It’s safest to include all three documents.
- Proof you still reside in the home. Any document that shows you live in the home, like a voter registration card in your name or a U.S. federal or state tax return.
- A valid Social Security card or number on a tax return or other government document.
- Your driver’s license and/or passport if you’re a senior citizen.
Depending on the rules of your state, you may be able to complete your homestead tax exemption application online. In some cases, you may have to make the application – make sure you do so before state application deadlines.
Once you fill out a homestead tax exemption, it will roll over automatically every year – there’s no need to file a new application unless you move to a new residence.