A homestead exemption provides a safety net for homeowners who can no longer pay for their primary residence due to the death of a spouse or after declaring bankruptcy. By extending relief from property taxes through a trying time, homestead exemption allows creditors to legally make provisions for their low-income homeowners.

The Purpose of a Homestead Exemption

Homestead exemption provides shelter as well as a financial safety net for those who would be homeless without their primary residence. If the death of a spouse, loss of a job, or other event makes the homeowner unable to pay their creditors, a homestead exemption can step in and prevent them from being forced to sell their primary residence.

Some states offer the benefit automatically while others require homeowners to claim the exemption. Additionally, relocating the primary residence would require re-filing for the homestead exemption.

Homestead exemptions cannot be obtained in the event that a homeowner defaults on their mortgage payments. Bank foreclosures cannot be prevented using this exemption.

Additionally, most states do not allow the homestead exemption on rental properties, even if they are single-family rentals.

Homestead Exemptions and Equity

Homestead exemptions are not the same in every state. A homeowner’s protection limit from their creditors can be as low as $5,000 and as high as $500,000.

In most states, the limit is based on the homeowner’s equity, not simply their property value. In other words, their financial claims and other debts such as outstanding mortgage payments factor into their equity and by extension, the protection limit on their homestead exemption. Creditors look at homeowner’s debt-to-equity ratio.

Notably, secured creditors cannot be affected by this protection limit. This is why the banks that mortgage a homeowner’s residence are not subject to homestead exemptions.

Bankruptcy, however, is a different matter. The protection limit of the homestead exemption depends on when the bankruptcy was filed and in which state. Some states impose their own protection limit and others use federal limits.

Homestead Tax Exemptions in Commercial Real Estate

Those who buy commercial properties may seek similar protection limits for their investments that homestead exemptions offer to residences. This differs between states, but such exemptions do exist.

Often, they include protection from creditors, ad valorem tax exemption (which comes in the form of the value-added tax), and a cap on value increases. Qualifying improvements on property will also increase a property’s value, which further increases the cap on property taxes for owners of commercial real estate.

Is the Homestead Exemption Tax Deductible?

Local and state laws affect how much of the homestead exemption can be deducted from a property owner’s taxes. Local government offices can assess properties for their predicted homestead tax exemption based on their value.

This gives a surviving spouse the opportunity to remain living in their primary residence after losing their partner’s income. The homestead tax exemption is often calculated as a fixed discount, such as $50,000 off the initial property appraisal.

This exemption allows property owners to treat their property taxes as a progressive tax that favors homes of less value and homeowners that have a lower yearly income. Homeowners must apply for the tax exemption from a local county or tax assessor, just as they do for the homestead exemption.