Taxes – nobody likes them, almost everybody pays them. But there may be some breaks up for grabs if you own or are thinking about buying a home. The homestead tax exemption allows homeowners to shelter, or exempt, part of their home's value from the property tax calculation, thus providing some relief from property taxes. Almost all states offer this tax break to residents with extra protection available for low-income seniors and disabled residents.
A Primer on Property Taxes
To understand the homestead exemption, you first have to understand property taxes. When you buy a home, the local tax authority will assess its reasonable market value, then multiply that value by a property tax rate. There's some scope to appeal the value if you think it's too high, but in general, the bill comes and people pay it.
The municipality sets the tax rate or "mill levy." This is an old-fashioned multiplier where one mill represents one-tenth of one cent. So, for every $1,000 of assessed value, one mill would equal $1.
It's important to understand that property taxes are assessed and administered locally. There is no state property tax. Rather, county, city and school districts all have the authority to raise taxes against the properties in their jurisdictions to fund schools, transportation, parks, libraries, emergency services and so on. The calculation is essentially done backwards. First, the local government decides how much it needs to raise in tax revenues, then it divides the budget figure by the total assessed property value in the region to find the applicable mill levy.
After each entity has declared its mill levy, the rates are tallied up to find the total tax rate. So, if the county wants 1.2 percent, the city wants 0.3 percent and the school district wants 0.8 percent, then the total tax rate for the region would be 2.3 percent. If an entity needs more money, then its mill rate might increase.
Calculating Homestead Property Tax Exemptions
Since property tax is a local tax, the state has remarkably little say about the property tax rate or whether it is moving up or down (although some states require a ballot to approve any major increases). The one way the state can protect homeowners from unfavorably high property taxes is through the state-wide homestead tax exemption.
Homestead tax exemptions are called "homestead" exemptions because they only apply to primary residences. You must live in the home to get the exemption; it doesn't apply to vacation homes or rental properties. Homestead tax exemptions are called "exemptions" because you're exempting or removing some of your home's value from property taxes. The exemption could be a fixed dollar amount such as $20,000, or it could be a percentage of the home's value such as 10 percent. It depends on where you live.
Here's an example. Suppose the assessed value of your home is $300,000 and the property tax rate, or mill rate, is 1.2 percent. Without a homestead tax exemption, the property tax bill will be $3,600. But if you live in a state with a $50,000 homestead tax exemption, the taxable value of your home will drop to $250,000, meaning your tax bill will drop to $3,000. The exemption gives you a saving of $600 on your annual property tax bill.
Generally, a percentage exemption will be more valuable to homeowners with pricier homes and a fixed-dollar exemption will be more valuable to homeowners with less expensive homes. But whichever method is used, the homestead exemption invariably will decrease the property tax burden for homeowners.
Homestead States – Property Tax Exemption
It's easier to say which states do not have a homestead tax exemption since the vast majority of them do. Some states don't have any homestead exemption on property tax, including New Jersey and Rhode Island. Homestead property tax exemptions should not be confused with Homestead Laws that protect property when a homeowner files for bankruptcy. However, even in these states, residents age 65 and older and disabled residents are generally entitled to some type of property tax credit, rebate or reimbursement.
While many states offer a homestead exemption, there's no uniformity in the way the exemption is assessed or granted. Some states give a blanket homestead tax exemption to all homeowners; others give exemptions to vulnerable groups like seniors, homeowners with disabilities and military veterans. Some states set an upper limit on the value of homes that qualify for the tax exemption; others set an upper limit on the household income that qualifies for the exemption. The toughest part can be finding out how much homestead tax exemption you're entitled to take!
To give some flavor of the types of exemptions offered, check out the following examples:
The state of Texas allows all homeowners a basic homestead exemption of $3,000 from county taxes and $15,000 from school taxes. For seniors and disabled homeowners, the school tax exemption rises to $25,000. Disabled veterans get a higher amount depending on the size of their disability rating.
The state of California exempts the first $7,000 of the home's value from property tax; this rises to $17,000 if you're a married veteran who served in a war or military campaign. Seniors and disabled people may qualify for additional assistance.
The state of Florida has a generous homestead law compared to other states; it's also one of the most complicated systems in the country. The current exemption is $50,000, of which the first $25,000 applies to all property taxes including school district taxes, and the second $25,000 applies to assessed values between $50,000 and $75,000 and only to nonschool taxes. If you owned a home with an assessed value of $85,000, for example, the first $25,000 would be exempt from all property taxes, the next $25,000 of value would be taxable, the third $25,000 would be exempt from nonschool taxes, and the final $10,000 would be taxable. Did we mention it was complicated?
Low-income senior citizens may exempt up to 100 percent of their home's value depending on the Florida county or city where they live, how long they've lived there and their annual household income.
The state of North Carolina does not have a general homestead tax exemption. Seniors and the disabled can apply for an exemption of $20,000 or 50 percent of their home's appraised value; assessments are based on household income.
Claim a Homestead Exemption
Benefiting from the homestead tax exemption requires an application in most circumstances, which you file with the local appraisal district. You won't be surprised to learn that every district has its own procedure. A quick read of the property appraiser's website should give you a heads up of the application process and any applicable deadline, for example, March 1 in the year for which you're claiming the exemption.
Homestead exemptions usually last as long as you live in the property so you do not need to reapply. The county assessor's office should automatically apply the exemption to each year's property tax bill. If you move to a new main home or make any changes to your ownership deed, you must re-apply for the homestead exemption. For instance, if you own the home with your spouse, you need to re-apply when your spouse dies. Every district is different, however, so do check the local rules.
Video of the Day
- Investopedia: How Property Taxes are Calculated
- Smart Asset: What is a Homestead Tax Exemption?
- Retirement Living Information Center: Taxes By State
- Nolo: Are You Getting All Your Texas Property Tax Breaks?
- Nolo: Are You Getting All Your California Property Tax Breaks?
- Florida Department of Revenue: Property Tax Exemptions and Additional Benefits
- Nolo: North Carolina Property Tax Breaks