The month of June is here and it's National Homeownership Month, a great time to learn about all things real estate. If you own or are looking to purchase a home, there's one important real estate concept that should be at the forefront of your mind. That concept is the homestead exemption.
The homestead exemption
The homestead exemption comes in many shapes and forms. Most often when people hear of homestead exemptions, they think of the homestead tax exemption. This property tax exemption is a state/local real estate tax program that aims to reduce the amount of property tax homeowners pay on their principal place of residence (i.e., your primary home). In short, claiming the exemption will reduce your property tax bill!
Depending on your locality, the exemption works in one of three ways:
- By excluding a portion of your home's value from taxation.
- By limiting the amount of property taxes a homeowner will be assessed (known as the floating-inflation exemption in many jurisdictions).
- By exempting certain categories of homeowners from their property tax obligation. The implementation of the exemption program and the eligibility for the exemption program vary by jurisdiction.
Note: Property taxes (an ad valorem tax) are based upon the assessed value of the property. If you don't agree with the assessor's findings, in many jurisdictions, you can appeal the assessment and have your home reassessed, thereby lowering your tax bill.
As you can see, the homestead tax exemption works to reduce the amount of property tax owed by homeowners on their principal place of residence. To use the exemption, you'll need to contact your state's property tax division to receive a homestead exemption application. You'll also need to contact your state's property tax division to learn the due date of the exemption so your property taxes will be paid, and if applicable, you can claim the deduction for taxes paid next tax year.
While you may be familiar with the homestead tax exemption, there's also another homestead exemption homeowners should keep in mind: the homestead bankruptcy exemption.
The homestead bankruptcy exemption
The homestead bankruptcy exemption can be claimed by homeowners when they file either Chapter 7 or Chapter 13 bankruptcy. Depending on the jurisdiction the homeowner resides in, the homeowner can use either their state's homestead exemption or the federal homestead bankruptcy exemption.
Note: The federal exemption amount is adjusted every three years. Presently homeowners can claim an exemption of $25,150 on their principal place of residence. Also, if a homeowner has a spouse, the homeowner cannot double the amount of the exemption.
The homestead exemption in Chapter 7 bankruptcy
If a homeowner files Chapter 7 bankruptcy, then the homestead exemption can help the homeowner stay in their home. While the amount of the exemption varies by state, in general, if the home equity is covered by the exemption amount and the homeowner is also up to date with the mortgage, then the homeowner can stay in the home. However, in certain jurisdictions, if the home equity is more than the exemption amount, then the trustee will sell the home.
The homestead exemption in Chapter 13 bankruptcy
Like in Chapter 7 bankruptcy proceedings, the homestead exemption can also be used in a Chapter 13 bankruptcy. In Chapter 13 bankruptcy, homeowners can protect their home using the homestead exemption, but the homeowner will have to reimburse the creditor for an amount equal to the nonexempt equity.
Note: With the June 30 end to the moratorium on foreclosures, impacted homeowners should carefully monitor bankruptcy laws as they relate to foreclosure laws. If you're a homeowner in this category, always consult with a competent advisor before proceeding with either bankruptcy.
While homestead exemptions extend to the principal residence in the event of a bankruptcy, the homestead bankruptcy exemption could also extend to other personal effects, like items used in a trade or business, money payable in the event of sickness, or health-related equipment.
Since the exemption varies by jurisdiction, to determine the property that's exempt in your jurisdiction, contacting your local legal aid or bankruptcy attorney is advisable.
The Millionacres bottom line
The homestead exemption is a valuable tool that can be used to protect your home from bankruptcy or to lower your property tax bill. National Homeownership Month is an incredible time to learn about the homestead exemption. Whether you're claiming the exemption to protect your home from bankruptcy or to lower your property taxes, knowledge of the exemption is a powerful tool to have in your mental arsenal.