What You Need to Know about Homestead Exemptions
By Georgia L. Stone
Georgia L. Stone, an attorney licensed to practice in Pennsylvania, may be reached at GeorgiaLStone@lawyer.com.
Whether you’re counseling clients through bankruptcy proceedings, evaluating tax liabilities, or just house hunting for yourself this summer, keep in mind the potential financial advantages for residences designated as “homesteads.” A homestead is generally defined as an individual’s primary residence, and most states provide various protections to owners in the form of a “homestead exemption.” Claiming a residence as your homestead offers bankruptcy advantages that you hope you’ll never need and property tax relief that you likely will pursue.
Each individual may claim only one residence as a homestead regardless of the jurisdictions in which the person owns real estate. The protections a homestead exemption offers vary by state and are established by state law. Generally, a homestead exemption prevents certain forced sales of a homeowner’s primary residence, protects a debtor’s primary residence in bankruptcy proceedings, and provides a property tax exemption to eligible residents.
Limited Bankruptcy Protection. In bankruptcy proceedings, the homestead exemption protects debtors by allowing them to exempt their primary residence from distribution to creditors in an amount up to either the federal exemption of $18,450 or the amount of their applicable state exemption. The state exemption was capped at $125,000 in 2005 by the passage of the Bankruptcy Prevention and Consumer Protection Act. This exemption allows debtors to retain their primary residence if the residence is valued at less than the applicable exemption amount. In the event that the residence is worth more than the applicable exemption amount, the creditor(s) can still force the sale of the property, but the debtor obtains the amount of the exemption from the proceeds of the sale.
Property Tax Exemption. As with the bankruptcy protection, the value of the property tax exemption available varies depending on limits set by each state. Generally, the state sets a fixed dollar amount for which the homestead will not be subject to state property taxes. To the extent that the residence is valued above that fixed exemption amount, regular property tax rates apply to the value of the residence minus the exemption amount. Thus, in a state where the exemption is capped at $100,000, a homestead valued at $300,000 would only have $200,000, the amount of the value that is above the exemption limit, subject to the state’s property tax rate. The exemption rate is often variable, and a higher limit may be in place for elderly property owners. Many states make up for the lost property tax revenue with additional sales taxes. Exemption amounts and home valuation methods vary across the nation, so be sure to check your state’s limits to determine your potential tax savings.
Don’t let the rustic connotations of the word “homestead” fool you. Homestead exemptions provide valuable protections and can offer significant financial savings to the urban, suburban, or rural homeowner.
Ready Resources
• What Estate Planners Need to Know About Asset Protection (Audio CD Package). 2007. PC # CET07EPNC. Center for CLE and the Section of Real Property, Probate and Trust Law.
To order online, visit www.ababooks.org.