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Homestead exemption

Have you heard of the homestead exemption but aren’t sure what it means? Bankrate explains.

What is homestead exemption?

Homestead exemption laws prevent the sale of a home in order to pay off taxes or creditors. Nearly every state in the U.S. has homestead exemption laws, and while the terms vary greatly from state to state, they all aim to lower property taxes and secure a family’s right to uninterrupted use of their home.

Deeper definition

Homestead exemptions were first offered as early as 1839 in the Republic of Texas, before the territory joined the U.S. They operate on the principle that preservation of the homestead is more important than settling outstanding debts, and provide a degree of immunity from certain property taxes.

A homestead is defined as a house and its adjoining land and buildings, legally registered as the principal dwelling place of a family. Some states offer automatic homestead rights; in other states, it’s necessary to register a claim through a process called homesteading, whereby the head of the household makes a written declaration that a property is the family’s principal dwelling.

The debt exemption component generally prevents creditors from forcing a sale of a home to pay outstanding debt. There is a major exception in nearly all homestead laws: if the home is collateral on a mortgage loan, the mortgage holder still has the right to foreclose. In some states there are other exceptions, such as in Texas, where the homestead exemption doesn’t apply in the case of debts owed to the federal government.

Some states offer exemption on some property tax owed on a home. This helps homeowners save on taxes, usually by removing a fixed monetary amount from the value of the property for taxation purposes. The value of the available tax exemption varies by state. In California, the exemption reduces the value of the property by $7,000 for tax purposes; in Louisiana, a homeowner is exempt from paying property taxes on the first $75,000 of the home’s fair market value.

Homestead exemption example

The Benedict family owns a giant ranch in rural Texas valued at $300,000. The maximum available exemption (from local property taxes) is $25,000. In addition, owners who are 65 or older get an additional $3,000 exemption. After applying both exemptions (the matriarch is over 65), the Benedicts only owe local property taxes on $272,000 of the value of their ranch.

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