6 Things to Know About Homestead Exemptions

Sometimes life can throw homeowners a curveball — a job loss, a major injury or illness or the death of a spouse — that can leave them at risk of losing their home. 

However, a homestead exemption can help keep the roof over their heads during a financial hardship by protecting them from the forced sale of their home to pay off creditors and clear debts. A homestead exemption can have other uses too, such as keeping older Americans safe on their properties and serving as a tax exemption for property tax relief. Here are six things every homeowner needs to know about homestead exemptions and how they may help shield your home.

1. What is a homestead exemption?

The word “homestead” refers to your primary residence, whether a house, a townhouse or a condo. And primary residence is key — the exemption doesn’t apply to second homes, summer cottages or investment properties.

A homestead exemption can legally shield you from losing your primary residence to creditors if your spouse dies or you need to declare bankruptcy. Its purpose is to secure a family’s right to keep their home over settling debts and appeasing creditors.

Homeowners typically need to apply for the exemption with their local government office. And if a surviving spouse moves to a new primary residence, they would need to reapply for the exemption.

2. Homestead exemptions vary by state.

The homestead exemption varies widely by state. New Jersey and Pennsylvania don’t have homestead exemptions, while Massachusetts and Rhode Island have set their exemption limit at $500,000. Some states, like Florida, Iowa, Kansas and Texas, provide unlimited financial protection against unsecured creditors for the home. 

The state exemption limits range from about $5,000 to $500,000, with an average of $30,000 to $50,000. The protection limits are for the equity in your home, not for the value of your property. If your equity is less than the limit, this law helps to stop creditors from selling your property. If your equity ends up being worth more than your state limit, creditors can still force the sale of your property. You’ll be able to keep a portion of the proceeds, though.

The exemption protection can shield you from unsecured credit, like credit cards, personal loans and lines of credit. It doesn’t, however, protect you from secured creditors, such as the bank that issued your mortgage. If you aren’t keeping up with your payments to secured creditors, the homestead exemption can’t help you keep your home, and your bank can still foreclose on your property.

3. What about homestead tax exemptions?

Homestead tax exemptions are separate from the homestead exemptions that kick in during bankruptcy or due to the death of a spouse. The tax exemption can lower how much homeowners pay in property taxes, along with how much their taxes can be raised annually. Here too, the property needs to be your primary residence, and the exemption won’t apply to rental or investment properties. You also must live in the home to apply for this tax break.

Forty-six states offer homestead tax exemptions, which also vary by state. But typically, homeowners can apply for a homestead tax exemption if they’re a senior, have a disability, are a veteran or are a low-income household. They can also apply for certain homestead tax exemptions if they are a surviving spouse who needs a tax break to remain in the home after a loss of stable income. In most cases, homeowners can’t combine these exemptions if they apply to more than one of these categories. Some states also have a limit on the value of homes that can qualify for exemptions, barring homeowners of expensive properties from applying for these tax credits.

States can issue homestead tax exemptions in two ways: according to the percentage of a home’s value, or by following a set dollar amount, like offering a $20,000 exemption on the assessed value of your home. If your state offers a percentage, this usually benefits homeowners with more valuable homes, while set-amount exemptions help homeowners with modestly priced homes.

Here’s an example: If your home is worth $250,000 and you pay 1.5 percent in property taxes, you’re looking at $3,750 in property taxes each year. With a homestead tax exemption providing you with $50,000 in tax relief, you’ll only have to pay taxes on $200,000 of your property’s assessed value. For homeowners in pinch, this can be a significant savings.

4. Bankruptcy exemptions.

The homestead exemption applies to some homeowners filing for bankruptcy too. Federal bankruptcy laws protect homes from being sold, if homeowners have less than $25,150 in equity (or double that for married couples who file jointly). In most states, homeowners have to follow state limits but those tend to be higher than the federal limits anyway.

While New Jersey and Pennsylvania don’t have homestead exemptions, homeowners in these states who file for bankruptcy can still apply for this exemption under the federal limits. This exemption only applies to unsecured creditors too.

By 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act was passed, putting a $125,000 limit on exemptions, regardless of a state’s exemption allowance, for homeowners who purchased their property within 40 months of filing for bankruptcy. This law was put in place to stop homeowners from keeping million-dollar homes while declaring bankruptcy.

If homeowners are considering bankruptcy but aren’t sure if they can protect their home through a homestead exemption, it’s worth checking policies in place in your state and how your situation fits in.

5. Other types of homestead tax exemptions.

States may provide other options for homestead tax exemptions that homeowners can apply for. In Texas, for example, homeowners can claim tax exemptions for school taxes (a $25,000 exemption from their home’s value), seniors or disabled exemptions (of up to $10,000) and county taxes (of up to $3,000).

Veterans, seniors, surviving spouses and homeowners with a disability that qualify for a property tax exemption receive the benefit on a continual basis. Once these exemptions are locked in, property taxes can’t be imposed on the rising value of your home — it’s like your home’s value is frozen under this homestead tax exemption. This is a great bonus to help these segments of society get a break with their finances.

It’s definitely worth your time to check on which homestead tax exemptions are available and applicable based to which state you live in.

6. Applying for a homestead exemption.

After doing your research, you may find you qualify for a homestead exemption. Depending on your state, you can apply for your exemption online or you’ll need to visit a local government office to fill out the paperwork.

Put together the documents that prove you own your home, such as a copy of your property deed, a tax bill and a mortgage bill, along with proof that you still live there, such as a voter registration card or a tax return. You’ll also need ID such as your driver’s license or passport.

You must reside in the home at the start of the year too. This means that if you move into a new home mid-year, you will have to wait until the next calendar year for the tax exemptions to kick in.