Homestead exemptions: What to know in bankruptcy cases and at property tax time

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The homestead exemption can offer a level of protection to homeowners at risk of losing their home to creditors. The law generally helps prevent foreclosure due to certain difficulties, such as bankruptcy or loss of a spouse.

There are also homestead tax exemptions in many states that can lower a homeowner’s property tax bill. Here’s what to know about both types of exemptions.

Bankruptcy homestead exemptions

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 to foreclose on the property. Simply put, the homestead exemption limits the extent to which they can claim your assets and 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.

All U.S. states allow some form of bankruptcy homestead exemption, although the exact level varies by state. Florida is one of the most generous, allowing unlimited exemption of up to 100 percent of the home 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.

There are also states where the protections haven’t been as far-reaching to date.

“California, for example, had a smaller homestead exemption when compared to the rising values of real property,” Colwell says. “Thankfully, the governor just signed a substantial new increase in the homestead exemption limits,” effective in January 2021.

There are federal homestead exemptions, as well, that may apply in some bankruptcy cases, in addition to a state-level exemption. Your attorney can help you with leveraging the appropriate exemption for your situation.

Property tax homestead exemptions

There are also property tax homestead 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.

Forty-six states and the District of Columbia currently have property tax exemptions, according to the Urban-Brookings Tax Policy Center. Typically, to leverage this exemption, the home in question must be your primary residence, not a vacation home or investment property.

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.

In either scenario, enlist help

An experienced bankruptcy attorney is your best source for up-to-date information on the laws relevant to your situation, and 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 with your attorney before you decide whether or not to proceed.

For specific information about homestead property tax exemptions in your state, start with the website of your state comptroller or tax office, or seek guidance from a professional tax preparer.

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