What is a Homestead Exemption?
A homestead exemption is a form of legal protection that exists in most states — and at the federal level — to shield homeowners from losing their homes to some types of creditors in the event of financial hardship.
🤔 Understanding homestead exemptions
A homestead exemption protects a home from some creditors in the event of financial hardship, including the death of a spouse. Most states have a homestead exemption written into law, though provisions vary greatly from state to state. There is also a federal homestead exemption. Homestead exemptions help to shield an individual’s home from a forced sale to benefit some types of creditors. These homestead exemptions can also help to reduce the property tax burden on some classes of homeowners. At both the state and federal levels, these exemptions apply only to an individual’s primary residence (their homestead). They cannot apply to rental properties, vacation homes, or any other property that does not serve as a primary residence.
Let’s say that a woman named Alice has recently been widowed. And let’s say that Alice’s husband had quite a bit of credit card debt — And the creditors have come to Alice for payment. They’ve tried to force the sale of her home to recover their money. Because Alice lives in Florida, which has an unlimited homestead exemption, the creditors cannot force her to sell the home to pay them back.
A homestead exemption is like an insurance policy for homeowners…
Just like most insurance policies, you hope that you’ll never have to use it. But if you need it, it can protect you from more significant loss — In this case, from the loss of your home.
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What are the benefits of the homestead exemption?
Homestead exemptions exist in federal law, as well as in most states. Only a few states lack homestead exemption laws, including Pennsylvania and New Jersey (homeowners in these states would still be protected under the federal homestead exemption).
Most states have a homestead exemption that is more generous than the federal homestead exemption. The law at the federal level only protects individuals who are filing bankruptcy. While the laws vary from state to state, most homestead exemptions have the same primary goals.
The primary goal of the federal and state homestead exemptions is to protect those facing financial hardship from losing their homes. This financial hardship might be in the case of a surviving spouse who is struggling to meet their financial obligations. It also applies in the case of bankruptcy to protect homeowners from being forced to sell their homes to pay creditors.
Another effect of homestead exemptions, at the state level, is to provide less-well-off homeowners with some relief from property taxes. The homestead exemption laws achieve this goal by reducing the taxable value of some homes when it comes to property taxes.
The process for benefiting from the homestead exemption varies from state to state. In some states, it’s automatic. If you own the home and use it as your primary residence, it is your homestead, and you receive the legal protections. In other states, there is a formal procedure you need to follow. In some states, you’ll need to formally declare your homestead, which requires that forms be filled out, either annually or a single time, depending on the state.
How does a homestead exemption affect your taxes?
One of the features of the homestead exemption in many states is a property tax exemption. This exemption allows homeowners to avoid paying property taxes on a percentage or dollar amount of the assessed value of their home. This exemption applies only to someone’s primary residence, not a vacation home or rental property.
For example, let’s say your state has a homestead exemption of $25,000, and your home has a value of $200,000. Ordinarily, you would be responsible for paying property taxes on the full $200,000. But with the homestead exemption, you’ll only have to pay property taxes on $175,000 of your home.
How does a homestead exemption protect your home from creditors?
Homestead laws generally protect your home from some types of creditors, meaning that those creditors cannot force the sale of your home to pay off outstanding debt.
This part of the homestead exemption is meant to help those who are struggling financially. In many cases, this might be a widow or widower who is at risk of losing their home after the death of a spouse. The homestead exemption is also often applied in cases of bankruptcy. This prevents the homeowner from losing their home to unsecured creditors.
The major exception to this rule is your mortgage loan. If you don’t make the payments on your mortgage, your lender maintains their right to foreclose. The value of the home itself is what the lender used to secure their loan to you.
Other exceptions to the homestead exemption vary from state to state. For example, in Texas, the homestead exemption doesn’t apply if the money you owe is to the federal government.
It’s important to note that homestead exemption protection doesn’t always protect a homeowner from losing their home, even if they’re dealing with an unsecured creditor. It only protects someone from losing their home if their equity in the home is less than the homestead exemption in your state. In many cases, homeowners won’t qualify.
Take a look at the federal homestead exemption of $25,150. Most homeowners probably have more equity than that in their home, meaning most wouldn’t be able to keep their home. If the homeowner’s equity is more than the exemption and they are forced to sell, they might be able to keep some of the proceeds from the sale rather than turning it all over to creditors.
Who qualifies for the homestead exemption?
Eligibility for the homestead exemption varies from state to state. In most cases, one has to meet the requirements of owning the home and having it as their primary residence. In some states, there are benefits that are specific to certain demographics. For example, many states have homestead exemptions that are more generous for elderly and disabled individuals.
In Texas, elderly and disabled homeowners can exempt $10,000 more than other homeowners when it comes to their property taxes. In Kansas, elderly homeowners qualify for a Kansas Property Tax Relief refund. This program allows them to have 75% of their property taxes returned to them each year.
What are some homestead examples in different states?
The benefits that the homestead exemption provides vary across the country. The homestead exemption at the federal level is in the U.S. Bankruptcy Code. The law allows homeowners to protect up to a certain amount of their home from being seized by creditors to pay for unsecured debt. Unsecured debt is debt like credit cards that isn’t secured by collateral. As of April 1, 2019, the federal homestead exemption is $25,150 for individuals filing bankruptcy and $50,300 for married couples filing bankruptcy. The amount increases every three years to keep up with inflation.
Most states have their own provisions in their homestead exemptions for individuals facing bankruptcy. Depending on the state in which they live, homeowners might be forced to use their state’s homestead exemption, or they might have the right to choose between the state and federal exemption. In many states, the homestead exemption is more generous, so it would make sense for individuals to use that exemption. That’s not always the case, though.
Here are some examples of homestead exemption protections in different states:
- California: Single homeowners can exempt up to $75,000; heads of household and couples can exempt up to $100,000; disabled and elderly individuals can exempt up to $175,000
- Georgia: Single homeowners can exempt up to $21,500 of their home equity, and an additional $5,000 that can apply to any property (including their home)
- Illinois: Single homeowners can exempt up to $15,000; married homeowners can exempt up to $30,000
- North Carolina: Single homeowners can exempt up to $35,000; married homeowners can exempt up to $70,000; elderly homeowners with deceased spouses can exempt up to $65,000
Many states’ homestead exemptions also include a property tax exemption, which doesn’t exist in the federal homestead exemption. Here are some examples in different states:
- Texas: Homeowners can exempt up to $25,000 as a school tax exemption. Elderly and disabled homeowners can exempt an additional $10,000. Counties can allow a homestead exemption of up to 20% or $5,000, whichever is less.
- Florida: Homeowners can exempt the first $25,000 of their home’s value from all taxes and the second $25,000 of their home’s value from non-school taxes.
- Kansas: Homeowners can apply for a partial property tax refund of up to $700 each year; low-income elderly homeowners can receive up to 75% for their refund.
A company called Asset Protection Planners maintains a listing of homestead exemption provisions by state. Of course, you should always do your own research and can check with your local or state government for current information.
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