Homestead exemptions can cut your property tax and keep you from losing your home in bankruptcy. It doesn't matter if you still owe a pile of debt on the house. As long as you live there and it's your primary residence, you can claim your exemption despite your mortgage. You do have to meet the state or federal requirements for a homestead, though.
When you file Chapter 7 bankruptcy, the bankruptcy court sells your assets to pay your creditors. The exception is property covered by either a state or federal exemption, and the exemptions often include your homestead. Say you have a $200,000 home, a $160,000 mortgage and a $40,000 exemption. The exemption protects all the equity you have in your home, so there's nothing to sell. If you own your $200,000 home free and clear, the court can sell your house, give you the value of the exemption and pay your creditors the rest.
Protecting Your Home
The amount of protection and what you do to claim it varies between the states. In Texas, for instance, you can protect the value of your entire homestead, though there's a limit to how many acres are covered. To claim it, you have to file a homestead declaration. In California, if you own your primary home, its homestead status is automatic. However, your exemption is much more limited: as of 2013, the maximum is $75,000 for most homeowners, though if you're old and poor, or disabled, it's higher.
Property Tax Savings
The homestead exemption for property taxes is a separate thing. Florida, for example, exempts the entire value of your homestead in bankruptcy, but the property tax exemption covers $50,000. If your house is your permanent residence as of Jan. 1, the appraised value of your home is cut $25,000 when calculating the school district's property tax on your house. The $50,000 figure applies only to non-school property taxes, such as cities, counties and fire districts.
Claiming the Tax Cut
States have created a number of exemptions for homeowners beyond the one that comes from just owning a homestead. Florida has added exemptions for widows, widowers and the blind, among others. Arizona offers them to widows, widowers and the disabled. You can research your state's exemptions on the state department of revenue website or on the one for your county's tax appraiser. The website should also explain what procedure you need to claim any exemptions.
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