Homestead Exemption: Definition and How It Works, With State List

What Is the Homestead Exemption?

A homestead exemption minimizes property taxes for homeowners. It's also a legal provision offered in most states that helps shield a home from some creditors following the death of a homeowner's spouse or the declaration of bankruptcy. The homestead tax exemption can provide surviving spouses with ongoing property tax relief on a graduated scale so homes with lower assessed values benefit the most.

The homestead exemption is helpful because it's designed to provide both physical shelter and financial protection. This can block the forced sale of a primary residence. However, the homestead exemption doesn't prevent or stop a bank foreclosure if the homeowner defaults on their mortgage.

How a Homestead Exemption Works

You may be able to apply for a homestead property tax exemption if you have a primary residence and want to reduce the overall property tax bill associated with that residence. Depending on where you live, you may not even have to fall within a certain subset of citizens to be eligible. Some states offer the exemption to every homeowner. However, most states often require that you be:

• An individual with a disability
• An older adult
• A veteran
• A law enforcement official or first responder with a disability

Some homestead exemptions are based on a flat reduction of all of the taxable value of your home. Other homestead property tax exemptions are calculated by a percentage. Lower-valued homes receive a larger reduction using the first method. The latter is a better choice for people with high-value properties.

A version of the homestead exemption provision is found in every state or territory with some exceptions, such as New Jersey and Pennsylvania. But how the exemption is applied and how much protection it affords against creditors varies by state. The homestead exemption is an automatic benefit in some states but homeowners must file a claim with the state to receive it in others.

A homestead property is considered to be a person's primary residence so no exemptions can be claimed on other owned property, even residences. A surviving spouse must refile for the exemption if they move their primary residence.

Protection From Creditors Under Homestead Exemption

The exemptions for homestead properties vary from state to state. A few states, including Florida and Texas, afford unlimited financial protection against unsecured creditors for the home, although acreage limits may apply for the protected property. A limit for protection from creditors can range from $5,000 to $500,000, depending on the state. Many states fall into the $30,000 to $50,000 range.

The protection limits are not for the value of the home but are for the homeowner's equity in it: the value of the property minus the balance of the mortgage and other financial claims on the property. A homeowner can't be forced to sell the property to benefit creditors if the equity held is less than the limit but creditors may force the sale If a homestead's equity exceeds the limits. The homesteader may be allowed to keep a portion of the proceeds, however.

Protection for the homestead property doesn't apply to secured creditors, such as the bank that holds the mortgage on the home. The homeowner is protected only from unsecured creditors who may come after the home's value to satisfy claims against the homeowner's assets.

Bankruptcy Protection

Federal bankruptcy law shields a home from sale if the owner's equity does not exceed $25,150 if the bankruptcy case was filed after April 1, 2019. The exemption is $23,675 for cases filed before that time.

Homeowners are forced to use the state limits in most states but they're often more favorable anyway. About one in three states allows a homeowner to use either the federal or applicable state limit.

Those who declare bankruptcy in New Jersey or Pennsylvania can get protection using the federal limits despite the absence of a state homestead exemption in these states. But bankruptcy protection only protects against unsecured creditors. It won't prevent a bank that holds a mortgage from foreclosing on the home.

Deducting the Homestead Exemption

A homestead tax or property tax is typically applied to homes based on the assessed value of the property by the local government tax assessor's office. The homestead tax can be a percentage of the property's value or a fixed amount.

The exemption may offer ongoing reductions in property taxes depending on state laws. These exemptions can help surviving spouses remain in their homes after their income has been reduced by the death of their partner.

Homestead tax exemptions usually offer a fixed discount on taxes, such as exempting the first $50,000 of the assessed value with the remainder taxed at the normal rate. Using an example of a $50,000 homestead exemption, a home valued at $150,000 would be taxed on only $100,000 of assessed value. A home valued at $75,000 would then be taxed on only $25,000.

Fixed homestead tax exemptions essentially turn a property tax into a progressive tax that's more favorable for those with more modest homes. The exemption is paid for with a local or state sales tax in some areas.

Example of a Homestead Exemption

Let’s say the assessed value of your home is $300,000 and your property tax rate is 1%. Your property tax bill would equal $3,000. But the taxable value of your home would drop to $250,000 if you were eligible for a homestead tax exemption of $50,000 so your tax bill would drop to $2,500.

The Bottom Line

The homestead exemption provides an exemption from property taxes on a home. The exemption also protects the value of residents' homes from property taxes, creditors, and circumstances that arise from the death of the homeowner's spouse. A homestead exemption ensures that a surviving spouse has shelter.

The exemption only applies to a primary residence and can't be claimed for another property elsewhere. Homestead protection is automatic in some states but homeowners must file a claim for a homestead exemption in others.