What Is a Homestead?

A homestead can be defined as the house and adjoining land where the owner primarily resides. Legally, what constitutes as a homestead varies state by state. Properties that qualify as homesteads may also benefit from homestead exemptions, which can offer homeowners certain financial and legal protections.

— What is a homestead?

— What is a homestead exemption?

— How does the homestead exemption work?

— The pros and cons of the homestead exemption.

— Who is eligible for the homestead exemption?

— How to apply for a homestead exemption.

[Read: Protecting Your Property: Scams That Put Homebuyers and Homeowners in Danger.]

What Is a Homestead?

A homestead typically refers to a permanent free-standing house, a condo or a manufactured home that the owner occupies as their principal residence. Although this is a broad definition, the exact definition of a homestead depends on the state.

State homestead laws allow homeowners to register part of their property as a homestead, which can offer property owners certain legal protections. Some state homestead laws can also mandate a maximum amount of property that can be claimed as well as the type of property.

What Is a Homestead Exemption?

The homestead exemption is an exemption or credit that a homeowner can claim on their primary residence to help minimize property taxes. “From a policy perspective, a homestead exemption is a simple way to provide property tax relief that’s targeted toward lower-income homeowners and seniors,” says Adam Langley, associate director of U.S. and Canadian programs at the Lincoln Institute of Land Policy. “It can provide a very meaningful benefit for them at a potentially modest cost.”

According to the Lincoln Institute of Land Policy, homestead exemptions and credits are the most common type of property tax relief.

Langley says that homestead exemptions are set at the state and sometimes local levels, and can vary widely around the country. Some states even restrict eligibility to seniors. Businesses, renters and owners of second homes are almost never eligible for homestead tax relief.

“By our count, 33 states have homestead exemptions or similar homestead credits that are available to either all homeowners or at least to all seniors,” he adds.

Homestead exemptions can also provide other legal protections, such as protecting property owners from creditors looking to collect a debt and providing protections to the homeowner’s surviving spouse or children. However, it doesn’t protect homeowners from secured creditors. For instance, if a homeowner defaults on their mortgage, the bank can choose to foreclose on the property.

[READ: Your Guide to Property Easements.]

How Does the Homestead Exemption Work?

How the homestead exemption works varies by state or territory, from how it’s applied, who’s eligible and how much protection it gives against creditors. Homeowners may also need to apply for the homestead tax exemption, which shields a portion of a home’s value from property taxes.

As far as taxes go, homestead exemptions are based on your home’s assessed value and can work in two ways: a flat-dollar amount or a percentage.

Flat-dollar homestead exemption: The flat-dollar exemption reduces the taxable value of the property by a fixed amount. For example, if your home is valued at $200,000, a homestead exemption of $15,000 means you only pay taxes on $185,000.

Percentage homestead exemption: Percentage exemptions reduce the taxable value of the property by a certain percentage. If your state has a homestead exemption of 15% and your home is $200,000, then you only pay taxes on $170,000.

“In many places, it’s a fairly modest exemption. It may reduce your assessed value by $20,000 and in turn, reduce your tax bill,” explains Langley. “In other places, it can be much more significant. There are places where there’s a 50% exemption, so the homestead exemption would half your property tax bill compared to what it would be if it were not your primary residence.”

The financial protection available with a homestead exemption also depends on where you live. In Florida and Texas, homeowners have unlimited financial protection, but there are acreage limits. Most states typically have a dollar limit on what can be protected.

Protection only applies to equity in the home, not the total value. If equity exceeds dollar limits, then the homeowner may be forced to sell. If equity is under the limit, then creditors cannot force the sale of the home.

Bankruptcy protection is a little different. According to federal bankruptcy laws, a homeowner cannot be forced to sell if the owner’s equity does not exceed $25,150 and if the case was filed after April 1, 2019. However, most homeowners use state limits, which tend to be more helpful.

[Read: Before You Buy: Conducting Due Diligence on a Property]

The Pros and Cons of the Homestead Exemption

Pros:

— Reduces property taxes that you pay on your home.

— Provides protection against creditors and stops the forced sale of your home.

— Provides protection for the owner’s surviving spouse or children.

Cons:

— Potential for a significant loss of revenue which could impact public services.

— Large tax exemptions could shift a majority of the tax burden over to businesses and other types of property that aren’t eligible for the homestead exemption.

Who Is Eligible for the Homestead Exemption?

States may restrict homestead exemptions based on income, age, property value, disability or veteran status.

“Homestead exemptions fall into a couple of categories. First, homestead exemptions are available to all owner-occupied primary residences. As long as it’s your primary home, you’re eligible,” says Langley. “The second category is programs for seniors. You’re eligible if it’s your primary residence and if you’re 65 years or older.”

“In the third category, there are some programs that provide exemptions specifically for veterans and disabled homeowners and potentially some other target groups,” Langley adds.

How to Apply for a Homestead Exemption

Homeowners must typically apply for a homestead exemption and the process may be different state by state. Langley says the most important difference when it comes to application processes for homestead exemptions is whether an annual application is required.

In some places, you apply once when you purchase a home to prove that it’s your primary residence and then you automatically receive it every year. However, there are other places where you need to reapply every year.

“Those tend to be more for the programs for seniors, veterans or disabled individuals,” he explains. “Those are usually larger homestead exemptions compared to the broad-based exemptions available to all owner-occupied primary residences.”

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What Is a Homestead? originally appeared on usnews.com

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