Homestead Exemption: What It Is And How To File

For the average homeowner, the most expensive part of owning a home is their monthly mortgage payment. What many first-time home buyers do not anticipate or understand, however, is that every homeowner must also pay property taxes, which, depending on their state and local tax laws and the value of their home, can run well over $10,000 a year in some cases.

To keep property owners’ tax burden from becoming too large, however, all U.S. states have some sort of property tax relief, called a Homestead Exemption, that limits the tax liability for citizens who meet certain requirements. Before even beginning to search for a home in a particular municipality, you should be aware of the state and local property tax rates and laws, since even communities that border each other can have widely divergent property tax burdens.

What Is Homestead Exemption?

A homestead exemption is a dollar amount or percentage of your home’s property value that is excluded when calculating your property taxes. In some states all property owners can be eligible for the exemption if certain conditions, such as a sudden rise in property values in their community, arise.

In most instances, however, a homestead exemption aims to minimize residents’ tax burden and/or to protect homeowners and their property’s value from creditors after experiencing financial hardship or the death of a spouse. It can also apply to the elderly or disabled, as well as veterans. For many people, the homestead exemption can reduce the monthly cost of owning their home and even protect them from foreclosing on their loan. In most U.S. states, the homestead exemption applies only to a person’s primary residence, typically defined as where they live at least 6 months out of the year.

How The Homestead Tax Exemption Works

Before determining how a homestead exemption can work in your community, it’s best to understand how property tax is determined in the first place. Your property is taxed based on its assessed value, as determined by local assessors. Oftentimes this value is either approved or adjusted (“equalized”) by county or state governing boards. The taxable value is usually 50% of the assessed value.

Since most of your property tax goes to supporting local government services (such as public schools, police and fire, parks, trash removal, etc.) your local government sets your tax rate, also known as a millage, which is a dollar amount per $1,000 of taxable value. Your tax is determined by multiplying your taxable value by the local millage rate and dividing that by 1,000. So, for example, if your home is assessed at $200,000, it’s taxable value is $100,000. And if the local millage rate is 21.5, your tax is calculated as:

$100,000 x 21.5 = 2,150,000 / 1,000 = $2,150.00

Homestead exemption laws vary by state but fall under two main categories. First, some states provide the exemption to all homeowners, while others give the break based on eligibility guidelines such as income level, property value, age, disability, or being a veteran or surviving spouse of a veteran. The second type of exemption provides specific protections to homeowners undergoing some type of financial hardship.

The first and broader category of exemptions give you a break by excluding a portion of your home’s value from assessment. The exemption may be calculated as a dollar amount or as a percentage of the property value:

• Flat-dollar homestead exemption: The taxable value of your home is lowered by a set amount, such as $50,000. So, if your home is valued at $200,000 and your county’s homestead exemption is $50,000, then you would only pay taxes on the remaining $150,000.

• Percentage exemption: The taxable value of your home is reduced by a certain percentage. If your county’s homestead exemption is 15% and your home is worth $200,000, then you would pay taxes on the remaining $170,000.

Other types of homestead exemptions provide homeowners protection from creditors in the event of a financial emergency or death in the family:

• Prevent the forced sale of a property: In some states, the exemption also provides financial protection to homeowners who are struggling with unsecured debt. The details vary by state, but take a look at one example to see how it works: Say your home is worth $200,000 and you have $40,000 of home equity (that’s your home’s value minus your mortgage balance). In your state, the homestead exemption protects up to $50,000 of assets. Because your home equity falls within the protected limits, your creditors can’t force you to sell the property and pay them back.

The homestead exemption may also apply to bankruptcies, although the protected limits vary. In states that allow homeowners to protect a specific dollar amount in bankruptcy, the exemption typically ranges from $10,000 to $200,000.

• Provide a surviving spouse with shelter or ongoing property-tax relief: The homestead protection typically applies to you, other owners of your home, and family members who live in your home – even after you die. This can provide much-needed protection for surviving spouses or other family members who rely on your home as shelter.

Homestead Tax Exemption By State

How To File Homestead Exemption

To file for a homestead exemption, visit your county or local Department of Taxation website and complete the Homestead Exemption Application. Be sure to review your area's specific deadlines and guidelines to ensure a smooth filing process.

Every state has their own requirements for who qualifies for a homestead exemption. Most states require that the home is your primary residence, that you are the primary property owner, and you meet specific income and age requirements. Homestead exemptions may also exist for taxpayers with financial hardship, such the loss of a spouse or even bankruptcy. Many states also provide relief for the disabled and veterans.

If applying, make a note of when all forms are due (usually in March or April of the year in which you’re seeking the exemption), and check whether you need to file just once or reapply every year. If you’re applying based on your marital status, age, or a disability, you may need to provide documentation to support your claim.

How To Appeal Or Cancel Homestead Exemption

If you believe you no longer qualify for an existing homestead exemption due to changes in your life (it is no longer your primary residence, for example), contact the municipality where you initially applied for the exemption for clarification. You can have the exemption removed if it no longer applies. Claiming an exemption for which you are not qualified is illegal and can result in your having to pay back taxes and/or penalties.

More Tips To Consider To Lower Your Property Taxes

If you don’t qualify for a homestead exemption, you may be able to lower your property tax bill by appealing your tax assessment. If you believe your home is overvalued, start by contacting your local assessor. Other steps you can take include:

• Hire a private assessor — you can use their assessment in your appeal
• Ask the local assessor to do a private walkthrough with you present
• Do not add on to the home or make other curb enhancements that can add to its value prior to assessment
• Do a thorough research of the values of similar homes in your neighborhood

Though it is not technically property tax relief, for people purchasing their first home there is also available income tax relief through the first-time home buyer credit. Ask your tax preparer for information on this benefit.

The Bottom Line

Property taxes make a great contribution to American society. They pay for most of the vital government services in your community, such as public safety, schools, parks, trash removal, and more. They can also be financially burdensome, adding potentially hundreds of dollars to your monthly house payment (typically a loan payment plus a combined 1/12 payment of both annual property tax and annual insurance policy).

Before purchasing a new house, be sure to understand the property tax laws in your new community. Based on the price of your new home, you should be able to make a quick calculation to get an estimate of your property tax. Next, you can research your state’s homestead exemption policy to see if you qualify for of these programs. If you do, you will have to apply for the exemption, most likely through your local city hall. It’s a bit more paperwork, but it could end up saving you hundreds of dollars a year.

Ready to start your home purchase journey? Get started by applying online today.