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What is a Homestead Exemption?
In the United States, a homestead exemption is a legal protection that safeguards the value of a home from taxes and creditors given the death of the homeowner spouse or following the declaration of bankruptcy. A homestead exemption is a form of law in many states that helps protect the value of a home after the demise of the homeowner spouse. This legal provision prevents surviving spouses from being deprived shelter or placed on heavy taxes after the death of their spouses. A homestead exemption provides tax relief and financial protection to the surviving spouses. This provision also prevents a forceful sale of the primary residence.
A Little More on What is a Homestead Exemption
Typically, a homestead exemption applies specifically to situations where a homeowner spouse dies or when homeowners file bankruptcy. How this exemption applies may also vary from state to state. Every state in the United States has homestead exemption in its laws except few states such as Pennsylvania and New Jersey that have no such law.
In most states that have the homestead exemption law, it is an automatic benefit that homeowners enjoy when they file a claim with the state. Cases relating to the death of a homeowner spouse of bankruptcy enjoy this automatic benefit. Ordinarily, the primary residence of a homeowner is called a ‘homestead’. Hence, homestead exemption is not applicable to other properties owned by the individuals.
Here are some key points you should note about a homestead exemption;
- A homestead is the primary residence of a homeowner.
- Homestead exemptions are applicable given the death of the homeowner spouse or when a homeowner is declaring bankruptcy.
- A homestead exemption offers property tax relief and relief from creditors to surviving spouses.
- Homeowners must file a claim with the state to enjoy this exemption.
- All states in the US have the homestead exemption law except New Jersey and Pennsylvania.
- The application or protection limits of a homestead exemption vary from state to state.
Creditor Protection Under the Exemption
One of the automatic benefits that homeowners enjoy under a homestead exemption is that it offers a financial protection against creditors. Unsecured creditors of a homestead are disallowed to trouble the surviving spouses on the non-payment of debts. In states like Texas and Florida, there is an unlimited financial protection against unsecured creditors, in other states, however, there is a limit for protection and this range form $30,000 to $50,000 or $5,000 and $500,000, based on the states.
It is important to note that this financial protection is applicable to unsecured creditors as secured creditors are not affected by the protection. Loans taken from banks, whereas mortgage is held on the home are also not protected by the homestead exemption.
For homeowners who make a declaration of bankruptcy, they can access bankruptcy protection at the state level or at the federal level. The Federal Bankruptcy Protection for instance prohibits the sale of a property of the owner’s equity is less that $25,510. When states limits are used, the terms are more favorable.
In New Jersey or Pennsylvania where there is no homestead exemption homeowners who declare bankruptcy can get protection sing the federal limits. The bankruptcy protection is also applicable for unsecured debts only. Secured creditors can seek foreclosure on the property as bankruptcy protection does not provide a shield from such.
Tax Reductions Under the Exemption
Another benefits that surviving homeowners enjoy under a homestead exemption is tax reductions or the property. This exemption offer an ongoing reduction on property taxes s a way of providing relief for the surviving homeowner.
Pertaining to tax reductions, homeowners enjoy an exemption of the first $50,000 of the assess value before a fixed discount on taxes is offered. When a homeowner enjoys a fixed tax homestead exemptions, the property tax is calculated as a progressive tax wi=hich is good for homes with little values.