How homestead exemptions work

As a homeowner, you might be looking for ways to save on property taxes and protect your assets. One way you can go about this is through the homestead exemption. This is a legal provision that may safeguard your home during bankruptcy in some states and can help reduce property taxes.  

To make the most of this valuable exemption, we'll walk you through what exactly it is, who qualifies for one, and when the homestead exemption can come into play.

Key takeaways

• A homestead exemption is a legal way to reduce your property taxes by lowering your home’s taxable value.
• In some states, it can also protect your home’s equity from creditors or bankruptcy.
• The homestead exemption applies to primary residences, not vacation or investment properties.

What is a homestead exemption?

A homestead exemption is a legal provision that can help you, as a homeowner, provide property tax relief by reducing your property taxes. Depending on the situation, it can also protect your home equity from creditors should you face financial hardship.

It works by reducing the taxable value of your primary residence. In other words, a portion of your home value won't be taxed. What's more, because your property taxes are based on your home's assessed value, this reduction can mean lower property tax bills.

Depending on the state you live in, the homestead exemption can also safeguard you should you find yourself in financial hot water, such as bankruptcy.

Who qualifies for a homestead exemption?

While the amount of the exemption and the qualification rules vary by state, there are common rules:

• You must own the home. Renters don’t qualify for the homestead exemption.
• It must be your primary residence. Generally, you must live in your home and declare it as your primary residence. In most cases, a vacation home or rental property is not eligible.
• You usually need to apply within a set time frame. Typically, you have a window of opportunity to apply for the homestead exemption, and deadlines can vary significantly by state.
• Some states allow doubling. In some states, if you are a married couple living in the home, it allows you to double the exemption amount. In others, there is only one amount, or there is a set amount for couples.
• There may be special exemptions. Some states offer larger tax exemptions for certain groups, such as senior citizens, veterans, disabled homeowners, and low-income homeowners.

Do all states offer homestead exemptions?

Not all states do, but it is common. How these exemptions work varies, specifically whether the exemption is applicable only for taxes, equity protection, or both. Plus, qualifying home values change often, so it’s important to check with your county assessor’s office, state tax authority, or a professional before making any decisions.

Here are common features:

• Scope of protection: Some states offer only property tax relief, while others also offer equity protection against creditors.
• Who qualifies: Most states have a primary residence requirement, but some also have other limitations, such as type of land, and other rules.
• Value of the exemption: The exemption can run from zero or a few thousand dollars to the entire value of the home.

How does a homestead exemption reduce property taxes?

A homestead exemption provides a tax relief by lowering the taxable value of your property's primary residence, so a portion of it won't be taxed. This can be a valuable tax deduction for homeowners.

For example, let's say your home is worth $600,000 and your state has a $50,000 homestead exemption. In that case, your property taxes are based on an assessed value of $550,000. If your property tax rate is 1%, your annual tax bill would be $5,500 instead of $6,000, which translates to $500 in annual tax savings.

Homestead exemption protections

Homestead exemption laws offer additional protections for homeowners. These protections may include: 

• During bankruptcy: During a bankruptcy, a homestead exemption can protect your home equity against creditors depending on the laws in your area. Consult the laws and a professional in your area to learn more.  
• To protect your equity: A homestead exemption can safeguard a specific amount of your primary residence's equity from creditors should there be a forced sale due to a bankruptcy or lawsuit.
• During job loss: Should you suffer a financial hardship such as a job loss and have trouble keeping up with your mortgage payments, a homestead exemption can protect a portion of your equity from creditors.
• To protect against debt collectors: If your home equity is less than the exemption amount, creditors can't force a sale. 
• During court proceedings: Should there be a lawsuit involving creditors, the homestead exemption can shield a certain amount of equity from being seized. And property cannot be seized and sold if the equity is less than the exemption amount.

It's a good idea to do your research or consult with a professional to see what protections local laws can offer.

How to apply for a homestead exemption

To apply for a homestead exemption, you can do the following and consult an expert in this area:

• Check to see if you're eligible. Research local laws and rules to see if you meet the criteria.
• Obtain the application. This may be done by downloading the form online or, in some cases, picking it up in person. You will need to research how the forms are distributed. Your local county tax assessor’s office may be able to guide you.
• Gather the required documents. Find out what’s required to document that you qualify.
• Submit the application by the required deadline. This may happen by printed form or online, depending on the procedures of your local government.

FAQ

Here are some frequently asked questions about homestead exemptions.

Do I need to reapply for a homestead exemption every year?

You generally don't need to reapply for the homestead exemption every year. If you are the owner and it's your primary residence, the exemption is up for automatic renewal.

How much money can a homestead exemption save me?

It depends, as the homestead exemption limits vary per state and can be anywhere from $10,000 to $200,000. Some states don't have any limits, and others don't have a homestead exemption in place. Some states may place limits on the age of the property owner or size and type of property.

Can I keep my homestead exemption if I move away from my home temporarily?

You might be able to keep your homestead exemption if you move away temporarily, as long as you don't establish a primary residence elsewhere and return to your home.  

When do I submit the homestead exemption application?

The deadline varies, but generally you should gather the required documents and apply as soon as you establish primary residence in your home.

Can I apply for a homestead exemption for a second home?

Generally, homestead exemptions are only for primary residences. If you buy a second home, they aren't usually eligible.

The bottom line: A homestead exemption can provide relief

When juggling the costs of homeownership, anything that can provide protection and help you lower your taxes can provide much-needed relief. By understanding what a homestead exemption is and its different protections, you can make the most of this valuable exemption.

If you're ready to buy a home, you can get preapproved for a loan with Rocket Mortgage.