When you hear the term “homestead” an image of 19th century pioneers heading west in a covered wagon to claim undiscovered land might come to mind. However, legally a homestead is defined simply as a person’s primary residence.
Now, what does a homestead have to do with your financial well-being? A “homestead exemption” serves two purposes: creditor protection and tax exemption. It can prove to be a valuable tool in helping you achieve financial freedom.
A homestead exemption typically protects your primary residence from a forced sale. If you default on a car loan, the lender financing the car can’t come after your home. Prior to the homestead exemption, creditors could force the sale of your home to satisfy virtually any form of debt. While laws vary depending on the state, in most instances the homestead exemption prevents this. However, if you default on your property taxes or foreclose on your mortgage, the homestead exemption can’t protect you.
In the event of bankruptcy, a homestead exemption can protect the debtor’s residence—providing he or she files for an application for a homestead exemption. It’s not automatic. As often happens, people found a way to abuse the system. Due to Florida’s lack of a maximum dollar amount, people were able to keep multimillion dollar homes while filing for bankruptcy. In 2005, Congress passed the Bankruptcy Prevention and Consumer Protection Act, which set a $125,000 limit on state exemptions for those who filed for bankruptcy within 40 months of buying the house of primary residence.
In the event of the death of a spouse, the surviving spouse retains the homestead right to the residence for life, given they continue to occupy the homestead property and keep up with mortgage payments and any other additional expenses.
The homestead exemption can lower your taxes by shielding a portion of your home’s value from taxation.
There are several different types:
County Tax: if a county collects a tax specifically for flood control or farm-to-market roads, you can qualify for a $3,000 exemption
School Tax: all residence homeowners are permitted a maximum $25,000 homestead exemption from their home’s value for school district taxes
65 & Older or Disabled: in addition to the $25,000 school tax exemption applicable for all homeowners, residents 65 and older or disabled further qualify for an extra $10,000 exemption. If a homeowner is 65 or older AND disabled, thus qualifying for the $10,000 exemption twice, he or she must pick one or the other.
Optional Percentage: an exemption of up to 20% of a home’s value can be added on by any taxing unit (city, county, school, special district). The decision and specific percentage depends on the taxing unit, which must choose whether to offer the exemption by July 1 of the tax year.
Optional 65 & Older or Disabled: $3,000 or more of an exemption can be offered by any taxing unit to residents 65 and older or disabled
Now, how do you get a homestead exemption? Fill out an Application for Residential Homestead Exemption through your appraisal district within one year following the delinquency date, which is typically February 1. Inform the appraisal district by the next May 1 if you change primary residence or fail to qualify for an exemption.
If you are not the only owner of the residence, the exemption amount is based on the portion you own. For example, if you own half of the house, you’d receive $12,500 of the $25,000 school district exemption.
Finally, make sure your home qualifies for a homestead exemption. It must be your primary residence, meaning the home’s owner must be an individual and use the home as his or her primary residence on January 1 of the tax year. As we’ve seen, the homestead exemption offers some different features for those 65 and older or the disabled. Neither the January 1 requirement nor the primary residence requirement apply. You’re allowed to move away as long as you return within 2 years and fail to establish a permanent principal residence at another location. That being said, if you are in the military or seeking help from a medical facility, your absence from the primary residence is allowed to extend beyond 2 years without disqualifying you from the homestead exemption.
Check to see what level of exemption is offered by your school district or other taxing unit. If you struggle with significant debt, a homestead exemption might help protect your home from the grasp of creditors. By reducing your tax liability, the homestead exemption can save you a significant amount of money and propel you towards your financial retirement goals.