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There are two types of homestead exemptions. As the name implies, both offer an exception to financial claims or obligations imposed on your home.
One kind of homestead exemption offers protection to homeowners at risk of losing their home to creditors. It’s a federal and state law generally helps prevent foreclosure due to certain financial hardships, such as bankruptcy or loss of a spouse.
The other kind is a homestead exemption from state property taxes — conditions which reduce or even eliminate the amount of the annual tariff homeowners pay on their residences.
Here’s what to know about both kinds of homestead exemptions.
What is the homestead exemption from creditors?
If you’re a homeowner and filing for bankruptcy, the homestead exemption can be used to shield your home’s equity from creditors who want it as payment for outstanding obligations. Simply put, the homestead exemption limits the extent to which they can claim your property.
“The homestead exemption can be a most powerful tool in helping common bankruptcy debtors protect and keep their home, while discharging debt,” explains John Colwell, a bankruptcy attorney and president of the board of directors at the National Association of Consumer Bankruptcy Attorneys.
If you’re filing Chapter 13 bankruptcy, the homestead exemption impacts how much, if any, is to be paid to creditors, according to John Rao, an attorney with the National Consumer Law Center.
If a homeowner is filing Chapter 7 bankruptcy, “the homestead exemption determines whether they are able to keep their home — or whether they would even file bankruptcy, since they are not likely to file if they have non-exempt equity,” Rao says.
How much is the homestead exemption?
All U.S. states allow some form of bankruptcy homestead exemption, although the exact level of it varies. Some states allow an unlimited amount of protection (up to 100 percent of your home’s value, of course); some set a fixed dollar amount. Some states allow married couples double the amount.
Florida, for example, is one of the most generous, allowing an unlimited amount to be protected against creditors in a bankruptcy filing, as long as the property has been owned for at least 1,215 days (40 months) and doesn’t exceed half an acre in a municipality or 160 acres outside of one.Pennsylvania and New Jersey do not offer state homestead exemptions against creditor claims; they allow taxpayers to take federal homestead exemptions instead.
There are federal homestead exemptions, as well, that may apply in some bankruptcy cases, in addition to a state-level exemption. A real estate attorney can help you with leveraging the appropriate exemption for your situation.
What is the homestead exemption from property taxes?
There are also property tax homestead exemptions, also known as “homestead tax exemptions,” that can help reduce your tax bill. You can think of them as the property tax equivalent of the standard deduction for income taxes: The exemption allows you to shelter an eligible portion of your home’s assessed value from property taxes, just as the standard deduction allows you to shelter a part of your earnings from income tax.
Typically, to leverage this exemption, the home in question must be your primary residence, not a vacation home or investment property. There may also be a limit on the value of a home that can qualify for an exemption.
Say a homeowner in Texas had her primary home assessed at $220,000, and she qualified for a $25,000 homestead exemption. Her property taxes for the residence would be calculated as if it were assessed at $195,000, effectively lowering her tax bill.
Who is eligible for a homestead exemption?
To be eligible for a homestead tax exemption, a person must actually occupy the home, and the home be considered their legal residence for all purposes. Eligibility varies by state, but typically you will be eligible if:
- your income is low
- you are a senior citizen
- you have a disability
- you are a veteran, or the surviving spouse of a veteran
If you fall into more than one category, you may get to combine the various exemptions.
What if I temporarily move away from my home?
If you’ve moved temporarily and haven’t established a permanent residence elsewhere, you can still claim the homestead exemption in some states under certain conditions. Typical ones include being in the military service or living in a facility providing services related to health, infirmity or aging.
Getting help with homestead exemptions
An experienced bankruptcy lawyer will be able to help you assess whether the exemption will allow you to keep your home if you file for bankruptcy. The question of whether your home would be exempt should be one of the first topics you discuss.
For specifics on homestead property tax exemptions in your state, start with the website of your state comptroller or tax office. You can also get guidance from a professional tax preparer or a real estate attorney.
To apply for a homestead exemption, you’ll need to fill out paperwork and provide documentation to your state treasury office or county tax assessor. You’ll need to provide documentation to prove that you qualify for the exemption, such as images of your driver’s license and military discharge papers, as well as annual tax returns.
Details on homestead tax exemptions are usually available on your county or local tax assessor’s website. Some states require you to fill out an application (often available online). Make sure to note your state’s application deadlines.
For the typical property tax homestead exemption, applications are generally due in the spring of the relevant tax year — as early as March 1 in some states (like Florida) and as late as April 30th (Texas). The deadline is often close to income-tax day (April 15) or the due date of your first quarter property tax payment. You must have been occupying the home since Jan. 1 of that year. Many states also allow you to make a late application for several months after the official deadline.
No, homestead exemptions are only available for primary residences. And you must be actively residing in the home; that’s what the term “homestead” means.