Homestead Exemption: What It Is and How It Works
What Is a Homestead Exemption?
A homestead exemption is a legal provision that shields a home from some creditors following the death of a homeowner’s spouse or the declaration of bankruptcy and minimizes property taxes for homeowners.
Key Takeaways
A homestead exemption reduces homeowners’ state property tax obligations.
The exemption can help protect a home from creditors or during bankruptcy.
The exemption only applies to one’s primary residence.
Most states have homestead exemptions, but the rules and protection limits vary.
Homestead Act
The Homestead Act, enacted during the Civil War in 1862, accelerated the settlement of the western territory. It allowed any adult citizen or intended citizen, who had never borne arms against the U.S. government, to claim 160 acres of surveyed government land. Claimants had to live on and cultivate the land.1
Additional homesteading laws were passed in the late 19th and early 20th centuries. The Federal Land Policy and Management Act of 1976 ended homesteading, except for Alaska, which allowed homesteading until 1986.
How to Qualify for Homestead Exemption
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 designed to offer both physical shelter and financial protection, blocking the forced sale of a primary residence.
Individuals may apply for a homestead property tax exemption if they have a primary residence and want to reduce the overall property tax bill associated with that residence. Some states offer the exemption to every homeowner, while others require individuals to meet certain criteria such as:
An individual with a disability
An older adult
A veteran
A law enforcement official or first responder with a disability
The homestead exemption doesn’t prevent or stop a bank foreclosure if the homeowner defaults on their mortgage.
Homestead Exemptions by State
Some homestead exemptions are based on a flat reduction of all of the taxable value of your home. A percentage calculates other homestead property tax exemptions. 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. However, 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.
Protection From Creditors
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 $550,000, depending on the state.32
The protection limits are not for the home’s value but for the homeowner’s equity. 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.4
Protection doesn’t apply to secured creditors, such as the bank that holds the mortgage. The homeowner is protected only from unsecured creditors who may come after the home’s value to satisfy claims against the homeowner’s assets.5
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, 2019.67 Homeowners commonly use the state’s limits, which often prove more favorable.
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.5
Deducting the Homestead Exemption
A homestead tax or property tax is typically applied to homes based on the assessed value 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 homestead exemption may offer ongoing reductions in property taxes depending on state laws.
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. With 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 be taxed on only $25,000.
Fixed homestead tax exemptions create a progressive tax that’s more favorable for those with modest homes. The exemption is paid for with a local or state sales tax in some areas.8
Do Homestead Exemptions Only Apply to a Primary Residence?
Homeowners must occupy the property as their permanent residence to qualify for a homestead exemption.
Where Do Individuals Apply for a Homestead Exemption?
A county or local tax assessor’s website or office will provide details on available homestead tax exemptions. Some states require an application, available online, and have deadlines.
What States Have Homestead Exemptions?
Most states have homestead exemptions except New Jersey and Pennsylvania. Some states have other homestead laws such as provisions that protect surviving spouses from creditors.
The Bottom Line
The homestead exemption provides an exemption from property taxes on a primary residence and protects the value from creditors, and circumstances that arise from the death of the homeowner’s spouse. The exemption 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.