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Tax Avoidance

  1. Double Irish Dutch Sandwich
  2. Earnings Stripping
  3. Franked Investment Income
  4. Tax Avoidance
  5. Tax Efficiency
  6. Tax Shield
  7. Lien
  8. Tax Umbrella
  9. Homestead Exemption

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Homestead Exemption: Definition & Overview

Updated: November 25, 2022

Homeowners who run the risk of losing their residence to creditors may find some protection through the homestead exemption. The law typically aids in preventing foreclosure brought on by specific issues, such as bankruptcy or the death of a spouse.

Many states also offer homestead tax exemptions, which can reduce a homeowner’s property tax burden.

Read on as we give you a full explanation of the homestead exemption, as well as lay out the advantages and disadvantages, plus give you a breakdown of how to apply for the exemption.

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    KEY TAKEAWAYS

    • A homestead exemption lowers the amount of state property taxes owed by homeowners.
    • In the event of a spouse’s passing or a homeowner filing for bankruptcy, the exemption can aid in defending a home from creditors.
    • In some states, the clause offers continuing property tax relief to surviving eligible spouses.
    • The only residence that is excluded is the owner’s principal dwelling.
    • Homestead exemptions are available in most states. However, there are different restrictions and levels of protection.

    What Is the Homestead Exemption?

    The homestead exemption is a strategy for homeowners to reduce their property taxes. In addition, most states have a legal provision that helps protect a home from some creditors once a homeowner’s spouse passes away or they file for bankruptcy. Survivor spouses may receive continuous property tax reduction because of the homestead tax exemption, which is applied on a tiered basis to favor properties with lower assessed values.

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    How Homestead Exemption Works

    Some homestead exemptions are calculated as a flat value reduction of your entire home’s taxable value. A percentage is used in other cases to determine the homestead property tax exemption. The latter is a better option for persons with high-value properties, but the former provides a larger discount for lower-valued residences.

    With a few exceptions, including New Jersey and Pennsylvania, every state and every territory has a variant of the homestead exemption provision.

    However, each state has its own rules for how the exemption is used and how much protection it offers against creditors. In certain areas, homeowners automatically qualify for the homestead exemption, while in others, they must submit a claim to the state in order to do so.

    Types of Homestead Exemptions

    Some states have more than one type of homestead exemption. Let’s take a look at Texas as an example. 

    According to the Texas Constitution, a person cannot lose their homestead rights unless they die, abandon their land, sell it, or have a claim against it foreclosed. 

    In Texas, there are two types of homesteads:

    • Urban and; 
    • Rural 

    Texas homeowners typically apply for homestead exemption to help reduce their taxes. Homeowners must occupy the property on January 1 of the given year in order to be eligible for the homestead exemption. A buyer who buys a house on January 2 must wait until the next year to apply for the homestead exemption.

    What Are the Advantages of Homestead?

    The homestead exemption is advantageous because it is intended to offer both material shelter and financial security, preventing the sale of a primary dwelling under duress. However, if the homeowner defaults on their mortgage, the homestead exemption does not stop or prevent a bank foreclosure. When a homeowner doesn’t make their mortgage payments on time, a bank will foreclose on their home and seize possession of it.

    What Are the Disadvantages of a Homestead?

    There are also some disadvantages of a homestead. These include: 

    • Homestead is not applicable in relation to Medicaid protection or state laws that enable Medicaid-related confiscation.
    • Probate or estate taxes are not avoided by homestead.
    • If a homeowner doesn’t make their mortgage payment, their bank can still foreclose on their home.
    • Some states choose not to participate in federal bankruptcy protection.
    • Homesteading can only apply to your main dwelling. It does not apply to any rented properties or second homes.
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    How Do I Apply for a Homestead Exemption?

    To apply for a homestead exemption, it is recommended that you directly access the website of your county or local tax assessor. Some states demand that you submit an application, which is normally available online. Ensure that you adhere to the application dates set forth by your state.

    It’s important to remember that you won’t have to pay a fee to submit an application for a homestead tax exemption to your county or municipal tax assessor. 

    You might be eligible to apply for a homestead property tax exemption if you own a primary residence and want to lower the total amount of property taxes owed on that residence. You might not even need to belong to a certain group of residents, depending on where you live, as some governments actually grant the exemption to every homeowner. But the majority of nations frequently demand that you:

    • A person with a disability
    • An elderly person
    • A veteran
    • A disabled member of the police or first responders

    Example of a Homestead Exemption

    Let’s say that your home has an assessed value of $250,000. In this example, your property tax rate is 1% meaning your property tax bill would equal $2,500. However, let’s now say that you were eligible to receive a homestead tax exemption that totals $20,000. 

    This would mean that the taxable value of your house would drop down to $230,000. In turn, this would mean that your tax bill would be reduced by $200 down to $2,300. 

    Summary

    The homestead exemption exempts a home from paying property taxes. The exemption also shields homeowners’ homes’ value from creditors, property taxes, and situations brought on by the demise of a homeowner’s spouse. Homestead exemption guarantees housing for a surviving spouse. 

    This exemption is only applicable to a primary dwelling. Meaning it cannot be used to offset the cost of any other property. Homestead protection is a given in certain areas. In others, landowners must submit a homestead exemption application to the state.

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    FAQS About Homestead Exemption

    Is Homestead a Good Idea?

    Since it is intended to give both material shelter and financial safety, the homestead exemption is beneficial.

    How Do I Homestead My House?

    The property you intend to claim as your homestead must be owned by you and serve as your primary, permanent residence.

    Which State Has the Best Homestead Exemption?

    Texas, Kansas, Florida, Iowa, and other states offer a homestead exemption with no dollar limit. In fact, due to the homestead exemptions in Florida and Texas, these states are well recognized for being tolerant of debtors.

    Can You Claim a Homestead in Two States?

    A single-family is unable to claim a complete exemption in more than one state. Meaning there is no additional exemption across two states.

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