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:  

  • Protect your home from creditors
  • Lower your tax burden through exemptions

It can prove to be a valuable tool in helping you achieve financial freedom, but more importantly by protecting your primary residence.

A homestead exemption may save your home!

A homestead exemption typically protects your primary residence from a forced sale.

For example, if you have unpaid credit card debt, or you default on a car loan, the homestead exemption can protect you from the creditor selling your house.

Other important elements in this type of situation are:

  • The type of legal action brought against you
  • If you file for bankruptcy and which kind (either Chapter 7 or 13)
  • The amount of equity in your home, and
  • Your state’s exemption amount and rules
What is a homestead exemption? It's a way to protect your house!
A homestead exemption is a great and inexpensive way to protect your home from creditors.

In some cases, your home will be protected, and in others, it can be sold (although, that isn’t typically the first step that creditors take).

Let’s look at an example:

If the equity in your home is less than the exemption amount, your home will not be sold.

Let’s say that you owe a lender $20,000 and the lender has sued you. You have a house valued at $280,000 on which you have a mortgage balance of $250,000. Your state homestead exemption is $50,000.

The $30,000 in equity that you have is protected under this scenario. The creditor cannot sell your house. 

Now, if the equity is above the exemption amount offered by your state, there is a possibility that your house could be sold.  

If you have a home valued at $275,000 and a mortgage with a balance of $175,000 with $100,000 of equity and the homestead exemption is for $50,000, that still leaves $50,000 that is not exempt.

If the home were to be sold, you would be eligible to receive a check for the amount of your state’s homestead exemption.

However, the specific details and actions are really going to depend on which state you live in. 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 don’t pay your mortgage, the homestead exemption can’t protect you.

Also, keep in mind that creditors don’t necessarily have to sue you first, especially if the debt you owe is secured by collateral.  

Your state determines homestead exemption rules

Your state decides whether you can use federal or state exemptions. If you have the option, you have to choose one over the other and you can’t mix and match. 

If you live in the following states, you can choose the federal exemptions:

Alaska, Arkansas, Connecticut, District of Columbia, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin.

If you don’t live in one of the above states, you can only use your home state’s exemptions. 

Each state is different and some will allow all of your equity to be protected while other states (New Jersey, Pennsylvania) don’t have a homestead exemption. 

Federal homestead exemption

As of April 1, 2019, federal exemption rules allow you to protect up to $25,150 of equity on your primary residence. 

By the way, your primary residence can be a house, condominium, even a trailer. However, you can’t use the homestead exemption to protect a rental property that isn’t your primary residence. 

The federal exemption amounts are updated every few years, with the next update coming in the year 2022. 

In the event of bankruptcy…

…the 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, like in Florida.  

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 a primary residence. 

Minnesota, Montana, and Nevada have generous homestead exemptions as well . . . all over $250,000. 

The surviving spouse provision

What does a homestead exemption have to do with the death of a spouse? 

Well, it can help you protect your home in the event that your spouse dies. The homestead exemption allows the surviving spouse to retain the homestead and receive a tax credit.

You must apply for the credit and meet the following general criteria:

  • Continue to occupy the homestead property, and 
  • Keep up with mortgage payments, and 
  • Pay additional taxes and expenses

These are general criteria and has you can guess, each state will have its own specific criteria, so check with your lawyer and on your state’s website.

Homestead tax exemptions

The homestead exemption can lower your taxes by shielding a portion of your home’s value from taxation. 

There are several different types:

Property tax: You can lower your tax bill by applying for the homestead exemption. Usually, property taxes are determined based on the assessed value of the home.

The more your house is worth, the higher the tax bill. If your state allows for a $20,000 homestead exemption and your home is valued at $250,000, your tax bill would be calculated from $230,000 ($250,000 – $20,000 = $230,000). 

Some states use an absolute dollar amount (like $20,000) while others use a percentage to determine the homestead exemption.  

Homestead credit: Some states even allow renters (especially if deemed low or moderate-income earners) to claim a credit that lowers their tax bill. 

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 depend 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.

Other states have different exemptions such as for the surviving spouse of a firefighter, peace officer, or U.S. military service member that was killed in the line of duty

Additional homestead exemption tips

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.  

Homestead exemption for those over 65 or disabled

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 applies. 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. 

Common homestead exemption questions

Do you need to file the homestead exemption claim every year?

If you are seeking a reduction in taxes using your state’s homestead laws, check to see if you need to refile your claim every year or not. As technology changes, some may get away with only filing the claim once while other states may require an annual claim to be made. 

How can the homestead exemption help you?

Check to see what level of exemption is offered by your school district or other taxing units. If you struggle with significant debt, a homestead exemption might help protect your home from the grasp of creditors.