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As a real estate professional, your role extends beyond selling properties. You are also a trusted adviser, guiding clients to reduce liability and risk in home ownership. One aspect of this responsibility is explaining the complexities of a homestead exemption.
A homestead exemption is a valuable homeowner protection that could improve your client’s financial wellbeing. This guide will delve into homestead exemptions, what they are, who is eligible, how to apply, which states have them, and more. By mastering this topic, you can provide your clients with an additional layer of service and help them secure their financial future.
What Is Homestead Exemption?
A homestead is the house a family owns and uses as a primary residence. An exemption is a freedom from liability or taxation.
Cornell Law defines a homestead exemption as a legal protection that prevents creditors from collecting debt from the borrower’s homestead and a limited exemption from property taxes. Property taxes are based on the assessed value of a home, and the money collected funds schools, libraries, roads, and more.
At its core, homestead exemption reduces the taxable value of a homeowner's primary residence, meaning a portion of the home value will not be taxed. This reduction results in lower property tax bills. The available exemption amount can depend on age, disability, marital status, dependent children living at home, and property type.
Homestead exemption laws vary from state to state and county to county, but the fundamental principle remains: Homestead exemption laws protect the homeowner and their family from paying property tax.
How Does a Homestead Exemption Work?
Here’s how a homestead exemption can translate to savings.
A homestead valued at $400,000, taxed at 1%, is eligible for an exemption of $50,000. The property's taxable value will be $350,000, and the tax bill $3,500.
Without the exemption, the property tax bill would be $4,000. The difference is only $500, but over a decade, that $5,000 could go toward other purposes, like cultivating financial wellness and preparing for retirement.
Forced Sale of a Property With Homestead Exemption
Homestead exemptions protect homeowners from the forced sale of the property in the case of their spouse’s death and declaration of bankruptcy. It does not, however, cover the homeowner if missed mortgage payments result in foreclosure.
In many states, the forced sale of the exempt property depends on the homestead equity.
Creditors can’t force a sale if the homeowner’s equity is less than the exemption limit in that state. If the homestead’s equity exceeds the exemption limit, creditors will likely force the sale.
For example, consider a property with a homestead exemption limit of $50,000. If the home's assessed value is $400,000 and has a mortgage balance of $310,000, a homeowner has $90,000 in equity. In this case, $40,000 of the equity is not protected. The creditor could force the sale for those $40,000, and the homeowner would receive $50,000.
If the non-exempt equity amount is less than the cost of selling the property, the creditor might seek a cash settlement instead.
The Financial Benefits of Homestead Exemptions
As property taxes increase nationwide, homebuyers will want to carefully consider the costs of property taxes and become familiar with policies for local homestead exemptions. Knowing where property taxes are lowest and highest can help them make an educated decision if they're considering leaving their home state.
A few of the key financial benefits of a residence homestead exemption include:
Protection Against Creditors:
In some cases, homestead exemptions offer protection from creditors, safeguarding a portion of a home's equity from being seized in the event of financial difficulties.
Increase in Home Equity:
By reducing property taxes, homestead exemptions allow homeowners to allocate more of their income toward building home equity, increasing their net worth over time.
Who Is Eligible for Homestead Exemption?
As a REALTOR® and a real estate agent, it can be helpful to familiarize yourself with your state and some surrounding state’s homestead exemption eligibility criteria so you can best advise clients. While the requirements vary by state, certain common factors typically determine eligibility:
Ownership:
You must be the legal owner of the property or have a legal interest in it, such as being a trust beneficiary. Specifications on marital status and joint ownership vary from state to state.
Primary Residence:
Most states’ homestead exemption laws apply strictly to the homeowner’s primary residence. Some states allow exemptions for secondary homes.
Occupancy:
You must occupy the property as your primary residence on a specific date, often called the "homestead date." This date varies by state.
Residency Duration:
Some states require homeowners to have lived in the property for a minimum period before becoming eligible.
Low Income:
A homeowner may be eligible for a homestead exception if the homeowner earns less than a specified annual income.
Veteran:
Persons with service-related injuries may qualify for homestead exemption.
Disability:
A person who is physically or mentally disabled and, as a result, cannot earn substantial employment.
Senior Status:
Some states limit homestead exemption eligibility to persons above a certain age.
How to Apply for Homestead Exemption
Applying for homestead exemption involves several steps that can vary by state and county. Here's a general outline of the process:
Check Eligibility:
A complete list of requirements can be found on your local property appraiser’s office website.
Gather Documentation:
Supporting documents vary by state but may include proof of property ownership, property folio number, marital status, social security number (or permanent resident immigration number for non-U.S. citizens), driver's license, and voter registration.
Submit the Application:
The homestead application must be completed correctly, providing all the required documents by the deadline specified on the property appraiser's website. Some jurisdictions receive applications right on their website.
Enjoy Savings:
Once the homestead exemption is in place, the homeowner will benefit from reduced property tax bills.
For detailed information on the application process and deadlines for homestead tax exemptions, visit your local government website.
The Role of Primary Residences
Homestead exemption programs typically focus on primary residences since a primary residence is more than just a piece of real estate—it's a family’s domicile. Designating a primary residence as a homestead can reduce a homeowner’s tax burden, which could translate into significant savings over the years. This distinction ensures that the residence homestead exemption benefits apply to homeowners who rely on their homes for shelter and stability. REALTORS® and real estate agents should guide their clients to maximize the property tax benefits available to them.
States With Homestead Exemptions
Most states have limits on the homestead exemption. States with specific limits could allow exemptions between $10,000 and $200,000.
Some jurisdictions, including D.C., Florida, and Texas, have no limit, meaning the entire homestead is exempt from debt service.
New Jersey, Virginia, and Pennsylvania have no specified homestead exemption.
Review this data on homestead exemptions by state for general reference, but follow the guidelines denoted by your county property appraiser to apply.
Homestead Exemption Tips for REALTORS®
REALTORS® have the unique opportunity to advocate for their client’s lives and families by educating them on homestead exemptions.
This opportunity first comes by educating yourself. The National Association of REALTORS® and its affiliates provide a wide range of real estate designations and certifications to help you grow your skills and knowledge.
The valuable protections of homestead exemptions go further when you understand the benefits and commitments, who qualifies, and how homeowners can apply in their state.
Your expertise in this type of tax exemption can be impactful for clients and add tremendous value to your services.