If you’re a homeowner and based in an eligible US state, you might be able to apply for a homestead exemption. But what is a homestead exemption?
Well, a homestead exemption offers a number of perks on the property you own and reside in, such as a reduction on the amount of annual property taxes you pay.
Moreover, not only can a homestead exemption potentially protect your property from creditors, but it can also protect a spouse in the event that a joint-homeowner passes away.
If you’re keen to find out more about homestead exemptions, I’ve created a comprehensive guide that covers everything you need to know. I’ve broken the guide down to cover the three main benefits of having a homestead exemption – which includes reduced property taxes, creditor protection, and surviving spouses.
Before I delve into the fundamentals, let’s begin by exploring whether or not you are likely to be eligible for a homestead exemption.
Am I eligible for a homestead exemption?
First and foremost, it is important to note that the rules surrounding homestead exemptions can vary quite considerably from state to state. In fact, states such as Pennsylvania and New Jersey do not offer homestead exemptions at all. Moreover, some states that do allow homestead exemptions might only offer them to certain demographics, such as veterans or over 65s.
Nevertheless, – and as the name suggests, the general consensus is that in order to qualify for a homestead exemption, you must be a homeowner that resides in the property. If the property that you own isn’t your primary residence – for example, it’s an investment or rental property, then you likely won’t be eligible.
Here’s where things start to get a bit tricky. Depending on the state you live in, the type of property that you reside in can also determine your eligibility. For example, the state of Texas allows you to claim an exemption if the property is a traditional free-standing home or condo, or even a mobile home. On the contrary, other states will permit free-standing homes only.
Before you continue reading my guide, my advice is to check the Asset Protection Planners website. They have compiled a list of the key state-by-state requirements on the types of properties that are eligible for a homestead exemption. If it looks like you’re covered, then I welcome you to move on to the next section – homestead tax exemptions.
Homestead exemptions on property tax
If you’re about to start the process of owning your first ever home, then you might be surprised to learn that you will be required to pay property taxes – each and every year. If you’re already a homeowner, then you’ll already know just how crippling these can be.
As this particular area of taxation is quite complex in the US – especially when factoring in homestead exemptions, I’ve briefly covered the ins and outs below.
What is property tax?
If you own a home in the US, then you will need to pay property taxes. This is administered and collected at either a county or municipal level, meaning that the amount you pay can vary wildly. In fact, local administrations usually meet on an annual basis to determine the rates that you will need to pay. This is typically in direct correlation to the amount of revenue they need to raise to pay for local services.
While the average property tax bill in the US was a whopping $3,498 per home in 2018, some states are less fortunate than others. For example, the likes of New Jersey, Connecticut and New York paid an average bill of $8,780, $7,222 and $6,947 last year, respectively.
Things can get even worse at a county level. Those based in Westchester and Rockland in the state of New York paid an average of $17,392 and $12,925, respectively.
At the other end of the spectrum, those based in Delaware, Arkansas and South Carolina paid an average property tax of $1,274, $721 and $821 last year, respectively. In fact, a special shout out goes to the tiny fishing village of Port Alexander in Alaska, which doesn’t levy any property taxes at all!
As such, it is crucial that you have a firm grasp of how property taxes are calculated, not least because it will have a direct impact on the amount of homestead exemption you’ll be able to claim. In this respect, you need to understand two key metrics – how the value of your home is assessed, and ‘mills’.
Lets’s start with the assessment value.
Home assessment value
Regardless of where you reside in the US, the amount of property taxes that you pay will depend on the value of your home. In order to evaluate the current market value of your home, an assessor from the local council will perform an estimation every 1-5 years.
They will usually do this by comparing your home to other properties that have recently sold in your neighbourhood. They will also take into account other key metrics, such as whether you performed an upgrade on your bathroom, or if you installed a conservatory extension.
Known as Millage, or simply ‘Mills’, your assessed home value will then be multiplied by the local property tax rate.
1 Mill equates to one-tenth of a cent, or simply $0.001. To calculate your annual property tax bill, you will then need to multiply the Mill rate against the assessed value of your home.
Confused? Well, let’s say that the assessed value of your home is $300,000. If the Mill rate was $0.004, you would be required to pay $1,200 in property tax ($300,000 x $0.004 = $1,200).
Some states will give additional exemptions if you are a veteran or over 65, or in some cases, if you are a first-time buyer. However, the above calculation remains constant throughout the US.
How to calculate your homestead exemption on property taxes
So now that you know what property taxes are and how they are calculated, it’s now time to see how much of a discount you can get on your homestead exemption.
In a nutshell, the exemption discount is calculated in one of the two ways. Either your local council will give you a percentage discount on the assessed value of the home, or a fixed dollar amount on the value of your home. Once again, the specifics will vary from state-to-state, so you will need to check this out for yourself.
Nevertheless, if your state implements a percentage discount, here’s a quick example. As noted above, your $300,000 home has a Mill rate of $0.004, and thus you pay $1,200 in annual property taxes. However, with your homestead exemption, your local state offers a 50% discount on the assessed value of your home.
This means that your property tax calculation is now based on an assessed home value of $150,000 (50% of $300,000). As the Mill rate remains the same ($0.004), your new annual property tax bill would be $600.
If we were to use the fixed dollar amount, the calculation would be slightly different. Let’s say that your local state offers a $50,000 homestead exemption on the assessed value of your property. This would mean that your newly assessed home value is $250,000 ($300,000-$250,000). At a Mill rate of $0.004, your new property tax bill would amount to $1,000.
The percentage exemption is more beneficial for those will a higher assessed home value, and the fixed dollar amount is more beneficial for homes with a smaller value. This, will of course, be down to the state that you live in.
So now that we’ve covered homestead exemptions on your property taxes, in the next section of my guide I am going to cover creditor protection.
Creditor protection with a homestead exemption
In the event that you become indebted to a third-party creditor, a homestead exemption can protect some or even all of the equity in your home from their recovery proceedings.
Anyway, before I go any further, I want to be clear that a homestead exemption doesn’t always protect you from creditors. Notably, if you owe money to your mortgage provider, federal or state tax authority, or a mechanic lien (for example somebody that performed home improvement services on your property), then the homestead exemption will not protect you.
If you do owe money to an individual or company outside of these parameters, then let’s explore what protections the homestead exemption actually provides.
Surprise surprise, the exemption will depend on your respective state! Before we give some examples, it is important to recognize that the exemption is usually based on the amount of equity that you have in the home – as opposed to the actual value of the property.
For example, if your home is worth $200,000, and you owe $150,000 to your mortgage provider, then the amount of equity you have in your home is $50,000.
Now, some states such as Florida have an unlimited exemption amount, meaning that regardless of how much equity you have in the home, your homestead exemption gives you 100% protection from creditors – as long as the debt is not linked to your mortgage lender, tax bill, or mechanic lien.
In other states such as Pennsylvania and New Jersey, no homestead exemption exists at all. For the rest of the US, most states will implement a fixed exemption amount.
Let’s say that your respective state has a homestead creditor exemption of $50,000. Your home is worth $250,000, and you currently owe $210,000 on your mortgage. As such, the equity on your home is $40,000. As this amount falls within the $50,000 exemption, your creditor cannot use your home as a means to settle the debt, and thus, they can’t force a sale.
In the case of Pennsylvania and New Jersey – which as noted above, does not allow a homestead exemption, there is always the chance that you can utilize federal protections.
This is usually only permitted in the event of bankruptcies. The federal protection amounts to $25,510, meaning that if the amount owed is less than this, and it is linked to a bankruptcy order, then you might be able to block the forced sale of the home.
However, this only applies to unsecured creditors. As noted above, if the debt is owed to your mortgage provider, tax authorities or a mechanic lien, then the federal protection won’t apply.
In terms of defining a spouse, I have assumed in this section that this includes a married partner. However, the terminology is crucial because, in some circumstances, it can also include a non-married partner or child. On a separate note, some states will also specify how much land you can include within the homestead exemption, as well as the type of property.
For example, Illinois – which permits a homestead exemption from creditors of $15,000, allows standard properties, as well as farms, lots, condos and mobile homes.
Over in Iowa, which has an unlimited homestead exemption, the state permits up to 40 acres of rural land, or half an acre of urban land. Kansas – which also permits an unlimited exemption, permits a whopping 160 acres of rural land, or 1 acre of urban land.
What if the amount owed is higher than the equity in my home?
If the amount of equity you have in your home is higher than the homestead exemption permits, here’s where things get a little tricky. Technically speaking, the creditor might be able to force the sale on your home.
For example, if the amount of equity that you have in your home is $60,000, but the homestead exemption in your state only permits $50,000, then the creditor might be able to get a court order to sell your home.
Each state will have its own rules surrounding the exemption, so you are strongly advised to seek legal advice if you are concerned about creditors using your home as a means to recover the debt. The purpose of this guide is to merely provide you with guidance, so please do bear this in mind.
So now that we’ve covered creditor protection, the final benefit of a homestead exemption that I want to discuss with you is with respect to surviving spouses.
Homestead exemption on surviving spouses
While this particular homestead benefit is closely linked to that of creditor protection, I thought it would be wise to create a separate section as the rules are ever-so-slightly different. In a nutshell, if your spouse – who was the homeowner of the primary property you reside in, passes away, then the homestead exemption could provide you with protection against creditors.
More specifically, the exemption seeks to block the forced sale of the home by creditors who seek to recover outstanding debts from the deceased homeowner spouse.
In some states, you won’t need to do anything to benefit from the surviving spouse homestead exemption rule, as the specifics are applied automatically, However, in other states, you might be required to file a claim with your local authority.
Additionally, if you do qualify for the exemption, you might also be eligible to receive ongoing property tax relief. This would work in the same way as I described in the property tax section above.
Don’t forget, if your homeowner spouse does pass away, you can only get the homestead exemption on the primary property. As such, if you spent time in other owned properties, you won’t be able to claim the exemption.
Once again, the states of Pennsylvania and New Jersey do not allow the homestead exemption, even on the surviving spouse rule.
In summary, the homestead exemption is a very important area of property law that you should spend some time researching. While I have provided with you with the basics, the underlying specifics will vary quite considerably on a state-to-state basis. This not only includes the rules themselves, but the amount that you are able to claim.
The good news for you is that as long as the property is your primary residence, and you are not based in the states of Pennsylvania or New Jersey, then you should be able to benefit from the exemption. The extent of the benefit will, of course, depend on where you live, so once again, do make sure that you do some independent research!
As a final note, you also need to check whether or not your respective state requires you to actually file for a homestead exemption. While some states apply the exemption automatically, others don’t.
As you will now hopefully know, the homestead exemption can be the difference between whether or not your property is sized by third-party creditors. This is why I urge you to research the rules in your local state to assess whether your property is covered, and if it is, whether you need to make the homestead exemption official.