Homestead Exemption

A homestead exemption is a legal provision that helps shield a home from some creditors following the death of a homeowner spouse or the declaration of bankruptcy. It can also provide surviving spouses with ongoing property-tax relief. Designed to provide both physical shelter and financial protection, the exemption can block the forced sale of a primary residence and provide tax relief on a graduated scale, so that homes with lower assessed value benefit the most from the exemption.

The provision is found in every state or territory, save for a few exceptions, including New Jersey and Pennsylvania, that have no homestead exemptions. Yet how the exemption is applied, and how much protection it affords against creditors, varies by state. (A company called Asset Protection Planners has assembled a comprehensive listing of state regulations. While the company says it attempts to keep the list updated, check the currency of its information before making decisions based on its data.)

The homestead exemption is an automatic benefit in some states; in others, homeowners must file a claim with the state in order to receive it.

Since a "homestead" is considered a person's primary residence, no exemptions can be claimed on other owned property, even residences. Further, if a surviving spouse moves his or her primary residence, they must re-file for the exemption.

A few states, including Florida and Texas, afford unlimited financial protection against unsecured creditors for the home, although acreage limits may apply for the protected property. More common, though, is a limit for protection from creditors that ranges between $5,000 and $500,000, depending on the state, with many states in the $30,000 to $50,000 range.

Those protection limits aren't for the value of the home, however, but for the homeowner's equity in it—as in the value of the property minus the balance of the mortgage and other financial claims on it. If the equity held is less than the limit, the homeowner can't be forced to sell the property to benefit creditors. If a homestead's equity exceeds the limits, however, creditors may force the sale, although the homesteader may be allowed to keep a portion of the proceeds.

Importantly, too, the protection does not apply for secured creditors, such as the bank that holds the mortgage on the home. Rather, the homeowner is protected only from unsecured creditors who may come after the value of your home in order to satisfy other claims against you and your assets.

There's a twist when it comes to bankruptcy protection. Federal bankruptcy protection, in 2019, shields a home from sale if the owner's equity in it does not exceed $25,510. In most states, homeowners are forced to use the state limits, which are often more favorable anyway. However, about one in three states allow either the federal or applicable state limit to be used.

Among the upshots: Those who declare bankruptcy in New Jersey or Pennsylvania can get protection using the federal limits, in spite of the absence of a state homestead exemption in those states. Note, however, that the bankruptcy protection similarly protects only against unsecured creditors; it will not prevent a bank that holds a mortgage on the home from foreclosing on it.

As noted earlier, a homestead exemption may also offer ongoing reductions in property taxes. These can facilitate surviving spouses remaining in their home after their income has been reduced by the death of their partner.

Homestead exemptions usually offer a fixed discount on taxes, such as exempting the first $50,000 of the assessed value, with the remainder 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, and a home valued at $75,000 would then be taxed on only $25,000.

Such fixed homestead exemptions, then, essentially turn property tax into a progressive tax that is more favorable to those with more modest homes. In some places, the exemption is paid for with a local or state (or equivalent unit) sales tax.