This is the tale of two basements in otherwise comparable houses. One is a finished basement with a den, bedroom, and full bathroom. The other basement has some Sheetrock, an exposed toilet, and a
What Is A Homestead Exemption
Owning a home is likely your biggest asset, but also your biggest expense. Between the mortgage, insurance, unexpected repairs like roof damage, property taxes, and possibly homeowners association fees, your home can take a big chunk out of your wallet.
But fortunately, a homestead exemption can provide a degree of relief from those property taxes. Here’s what you need to know about a homestead exemption.
What is a homestead tax exemption?
What exactly is a homestead exemption? Essentially, it's a law that helps protect the value of your home.
“Homestead tax exemptions waive a certain dollar amount or percentage of home value from property taxes,” says Jay Hobbs, a real estate agent at Long & Foster Real Estate, in Washington, DC.
The word "homestead" indicates that the exemption can be used only for the home you spend most of your time in.
“The incentive applies only to primary residence, not investment property or second property,” says Julie Upton, a real estate agent at Compass in San Francisco.
Homestead exemptions usually offer a fixed discount on taxes, such as exempting the first $50,000 of the assessed value, with the remainder of the home's value being taxed at the normal rate. For example, using a $50,000 homestead exemption, a home valued at $150,000 would be taxed on only $100,000 of assessed value.
Hobbs provides another example: If the value of your home is $300,000, and your property tax rate is 1%, your property tax bill would equal $3,000. However, if you were eligible for a homestead tax exemption of $50,000, the taxable value of your home would drop to $250,000, meaning your tax bill would drop to $2,500, saving you $500.
But homestead exemptions don’t just apply to taxes. This provision can also help homeowners shield some of their home's value from creditors. If bankruptcy or the death of a spouse brings debt collectors to your door, a homestead exemption prevents the forced sale of your primary home. The homeowner is allowed to claim a certain amount of equity in the property as exempt from collection by creditors.
Again, using our $50,000 homestead exemption example, if a homeowner has a property valued at $300,000, the creditors are only entitled to $250,000.
Homestead exemptions vary by state
Homeowners living in every state except New Jersey can take advantage of a homestead exemption. It's also worth noting that Pennsylvania's homestead exemption is small: a mere $300.
Texas, Florida, Kansas, and Oklahoma have some of the most generous homestead exemptions. In Texas, for example, all homeowners are allowed a $25,000 homestead exemption for school taxes. And seniors and disabled homeowners qualify for an additional $10,000 exemption. Texans can also claim an additional $3,000 exemption for certain county taxes.
In California, however, the exemption is much lower: The first $7,000 of the value of the home is not taxed. So, if your home is assessed at $600,000, the tax liability would be on $593,000, not $600,000.
“With exceedingly high home prices in the state of California, most residents feel the exemption is negligible,” Upton says.
For Mark Ross, founder of Ross NW Real Estate and professional real estate broker, real estate has always been the career of choice. During his 25+ years in the industry, Mark has gained experience in....
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