Homestead xemption, explained

Looking for relief from property taxes? Your state’s homestead exemption can help. This exemption can lower the amount of property taxes you pay on your home each year. If you are struggling to pay your bills, this exemption can act as a financial safety net.

But how does the homestead exemption work and who qualifies for it? Read on to find out.

What is a homestead exemption?

Most states offer homestead exemptions that reduce the assessed value of your home. Say your local tax assessor says that your home is worth $300,000. If you qualify for a homestead exemption of $50,0000, you will now pay taxes as if your home is worth only $250,000. This will reduce your property tax bill.

Another form of the homestead exemption might also protect you from creditors, something that could keep you from losing your home if you are struggling to pay your bills on time.

Not all states offer homestead exemptions. And in many states, you must meet certain criteria, such as being 65 or older or a U.S. Military veteran, to qualify for one of these exemptions. Other states require that you have a disability that limits your income.

The challenge regarding homestead exemptions? Every state’s program works differently.

How does the homestead exemption work?

A homestead exemption can protect you from property taxes up to a certain point and protects you from creditors by shielding a portion of your property's assessed value. As a property owner, you must live in a primary residence in your state and may have to meet other criteria, such as having a low income or disability. Other states provide homestead exemptions to veterans of the military.

Homestead exemption from property taxes

To determine how much you owe in property taxes each year, your local assessor calculates a value for your home. The higher this assessed value, the more you will pay in property taxes each year.

Governments, though, realize that some homeowners can't afford to pay higher property taxes. This is why many states offer homestead exemptions to homeowners who are 65 or older or suffer from a disability that limits their incomes. Other states provide a homestead exemption so that military veterans who have served their country can enjoy the reward of a lower property tax bill. Still others offer exemptions to every homeowner who has a principal residence in their state.

Property tax exemptions can vary by state, but often a homestead exemption reduces the assessed value of your property. If your local assessor determines that your home is worth $325,000 and your state offers a homestead exemption of $50,000, your home would be taxed as if it was instead assessed at $275,000. Because of this, your property tax bill would be lower.

Some homestead exemptions come in the form of a flat fee reduction of your assessed home value. Others might offer a percentage reduction. Your state, for instance, might reduce your home's assessed value by 20% under its homestead exemption program.

Many states will require that you live in your home as a primary residence to qualify for a property tax exemption. This example of the Illinois homestead exemption is typical. 

Homestead exemption as protection from creditors

Some states’ homestead exemptions serve another important purpose: They can protect a certain amount of the equity that you've built in your home if you owe money to creditors.

Equity is the difference between what you owe on your mortgage and what your home is worth. If your home is worth $400,000 and you owe $250,000 on your mortgage, you have $150,000 in equity.

The protection that homestead exemption laws provide varies by state. But say your state's homestead exemption will protect $75,000 to $150,000 of your equity.

If a creditor forecloses on your home because of debt you owe, and you have $150,000 of equity, you will receive a payment of up to $150,000 from the state after the foreclosure closes. Your creditor will receive any remaining funds from the sale of your home.

How much of your equity that you'll get to keep can vary widely according to your state. In Illinois, the exemption only protects up to $15,000 of equity for single homeowners and up to $30,000 for married ones. In New York state, the amount of equity protected from creditors varies according to county, ranging from a high of $150,000 to a low of $75,000.

It’s important to note that the homestead exemption, while protecting at least some of your equity, won’t necessarily stop a creditor from taking over ownership of your home through foreclosure.

Homestead exemption as protection from bankruptcy

The homestead exemption can also keep you from having to sell your home in a Chapter 13 or Chapter 7 bankruptcy filing.

Often when you file for bankruptcy protection, you'll have to sell some or all your assets to help pay back at least some of what you owe to your creditors. Your homestead exemption, though, will protect some of the equity you’ve built in your home. And if it protects enough, you might not have to sell it.

For instance, say you've filed for Chapter 7 bankruptcy protection, and you live in a state in which up to $75,000 of the equity in your home is protected by a homestead exemption. If your home is worth $300,000 and you owe $250,000, you have $50,000 in equity. Because your exemption covers all your home equity, you will typically keep your home.

But say you have $200,000 of equity in a home worth $500,000 and your state's homestead exemption allows you to protect up to $100,000 of equity. Because your homestead exemption doesn't protect all the equity you've built, the bankruptcy trustee handling your case will probably sell your home to help pay your creditors. But you will receive a payment of $100,000 because your state's homestead exemption protects that much of your equity. The trustee will use the rest of your home sale's proceeds to pay your creditors.

Which states have homestead exemptions?

Every state except for New Jersey and Pennsylvania has some version of a homestead exemption. Not all states offer both property tax exemptions and protection from creditors, though. And the amount of tax exemptions that states offer varies.

For instance, Illinois offers a general homestead property tax exemption for all state homeowners who occupy a home as their principal residence. This exemption has a maximum value of $10,000 in Cook County – home to Chicago – $8,000 in counties contiguous to Cook County and $6,000 in all other counties.

In Texas, you can qualify for a $40,000 property tax exemption if you live in your home as a permanent residence. This will reduce your home’s assessed value by $40,000, lowering your property taxes at the same time.

In Iowa, the homestead property tax exemption is equal to the home's actual tax levy on the first $4,850 of actual value. It is eligible for homeowners who occupy the property for at least 6 months of each year.

If you want to research your state’s homestead exemptions, check the website or call the office of your county or local tax assessor’s office. Officials here can tell you what type of homestead exemption your state offers, the requirements you need to meet to qualify and by how much the exemption might reduce your property tax bill.

Who qualifies for a homestead exemption? 

Some states offer homestead exemptions for all homeowners if these homeowners occupy their properties as principal residences. Others, though, only offer exemptions to homeowners who are 65 or older, veterans of the U.S. Military or people who suffer from disabilities.

Some states offer different exemptions for property owners and for veterans, senior citizens and people with disabilities.

How to apply for a homestead exemption

The steps you take to apply for a homestead exemption will vary by state. The good news, though, is that in most states you'll only apply for your exemption when you first move into your home. After that, your county will apply your exemption automatically each year until you move out.

In Indiana, for example, you'll need to contact your county auditor, who will advise you on the steps necessary to file. You can also visit the online home of Indiana’s Department of Local Government Finance for application forms.

To file in Tennessee, though, you'll need to register with the State Board of Equalization of the Tennessee Comptroller's office.

Because the application process differs by state, it's best to ask your real estate agent or mortgage lender about the steps you'll need to take, or which government agency you'll need to contact, to apply for your homestead exemption.

FAQ about the homestead tax exemption  

Those with questions about the homestead property tax exemption may find their answer below.

How much is the homestead exemption?

The size of your homestead tax exemption varies by state. Some states offer a flat exemption, such as a $40,000 decrease in your home’s assessed value. Others reduce your home’s assessed value by a percentage. Check with your county assessor’s office to learn how valuable your state’s property tax exemption might be.

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

This, again, will depend on your state. You might, though, retain your homestead exemption if you move away temporarily if you don’t establish a permanent residence in another state.

When do I submit the homestead exemption application?

When you apply for a homestead exemption will vary by state. To make sure you don’t miss out, check with your county assessor’s office. If you are buying a home, you can also ask your real estate agent or mortgage loan officer. In some states, you only apply for the exemption once before it automatically renews each year.

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

Homestead exemptions are only available for primary residences. This means that you can’t get a property tax reduction on a second home that serves as an investment or vacation property. That doesn’t mean that buying a second home isn’t a smart decision. Just don’t expect a property tax deduction on a home that isn’t your primary residence.

The bottom line

Depending on the state in which you live, the homestead exemption can reduce your property tax bill and protect you from creditors hoping to force a sale of your home. This is good news: Property tax bills are high in many parts of the country. An exemption might make it easier for you to afford homeownership. If you are ready to purchase a home, it might be time to learn more about property tax exemptions.