What is the Homestead Exemption? - Definition & Importance

Instructor: Racquel Fulton

Racquel is a Real Estate Licensee and holds a New Jersey Title Insurance Producer Certification

If you owe debt to a creditor, they may have a lawful right to take your house. Learn how a homestead exemption works to save your home. Find out more about this real estate concept, which can also be a valuable tool for lowering property tax bills.

Homestead Exemption, Defined

Under the law, the house that you own and live in as your primary residence is a homestead. This also includes the land and any detached property such as a garage, guest house, shed, barn or dog house. To protect your homestead, many states offer a homestead exemption.

A homestead exemption serves two purposes. It protects homeowners from losing their homes as a result of judgments and liens, and it provides property tax relief by lowering property tax assessments.

When You Owe a Debt

If you owe money to a business and are unable to pay, the business has a lawful right to collect the outstanding debt from you. In a court of law, the business that you owe money to is called a creditor. Creditor rights allows a business to enforce the repayment of a debt. The laws concerning the enforcement of creditor rights vary in each state. However, many states will allow the creditor to file a lawsuit. If a lawsuit is resolved in favor of the creditor, a judgment may be filed against you, so that the debt can be repaid. The creditor can proceed to enforce the judgment in the following ways:

  • Forced bankruptcy
  • Garnishment of bank accounts and wages
  • A lien placed against personal property and real estate

If a lien is placed against your home you could be forced to sell it to repay the debt.

IRS Liens and Levies

If you own a home and owe money to the federal government, namely the Internal Revenue Service (IRS), the IRS can use similar and more advanced measures than a creditor to enforce payment of the debt. If you claim a homestead exemption to protect your property, the IRS may still enforce the seizure and sale of the property. In many cases, the IRS will determine if there is enough equity in the property to recover the debt.

As an example:

Andy owns a home in California. It is his primary residence. The home's market value is $600,000. Market value is the amount that a property can presently sell for. Andy obtained a mortgage loan to purchase the home and owes an outstanding balance of $250,000. Under California's homestead exemption law, Andy is able to file a homestead declaration. The declaration allowed Andy to protect $75,000 of the equity in his home. Equity is the market value minus any outstanding debts against the property.

Market Value $600,000
Less the Mortgage Balance $250,000
Equity $350,000

Andy received notice of a lien from the IRS for a $40,000 unpaid personal income tax debt. The IRS can decide to enforce the lien by seizing and selling Andy's home. If his home is sold, Andy will be entitled to receive the $75,000 value of the equity he protected under California's homestead exemption law.

Property Tax Relief

The other purpose of a homestead exemption is to offer homeowners what is known as property tax relief. Some states, counties, and local municipalities will reduce a property's assessed value when a homestead exemption is claimed, which can result in a lower property tax bill.

The assessed value is usually lower than the market value. Assessed value is generally determined by a local tax assessor. It is the value that a local government believes a property is worth, for taxation purposes.

For example:

Joe and Joanne Jones own a home in Broward County, Florida. The county assessor has valued their home at $202,500. Based on the assessed value, the Jones' current property tax bill is $4,291. The couple live in the home and use it as their primary residence. The Joneses claim a homestead exemption to lower their property tax bill. The homestead exemption does not change the assessed value of the home, it simply makes $25,000 out of the total assessed value exempt from taxation.

  • Before Claiming the Homestead Exemption:

Assessed Value $202,500
Property Tax Bill $4,291
  • After Claiming the Homestead Exemption:

Assessed Value $202,500
Less the Homestead Exemption $25,000
New Assessment for Tax Purposes $152,500
New Property Tax Bill $2,048.45

Joe and Joanne Jones save $2,242.55 by receiving a homestead exemption.

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