Homestead Exemption STAFF PICK

Rehan Shams Alimohammad

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Tax Lawyer - Sugar Land, TX

Contributor Level 14

Posted over 3 years ago. 3 helpful votes

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The Homestead Exemption is a commonly misunderstood legal matter. There are actually two separate and distinct legal issues that are both referred to as Homestead Exemption. A Homestead Exemption can be a certain type of tax exemption and it can also be a protection of one’s home from creditors. It is important to know the differences between the two since they are two separate subjects and each state has its own rules and regulations regarding each. This article intends to clarify some of the most common features of both.

Homestead Tax Exemption

A Homestead Tax Exemption removes part of a property’s value from being taxed by the state. For example, if your property is appraised at $100,000 and the Homestead Tax Exemption is $20,000, you will pay taxes on just $80,000 of your property. Each state has its own laws regarding the amount the exemptions are worth. Typically it is common for the amount to be adjusted periodically based on inflation or deflation of the economy. It is also common for certain groups, like those aged 65 or over and those who are disabled, to receive larger tax breaks.

Several different types of exemptions exist. For example, Texas gives homestead tax breaks for school taxes and county taxes. Many states also set limits on the area that can be considered for exemption. In Texas, a person’s property can be up to 20 acres and still qualify for the Homestead Exemption.

Qualifications for Tax Exemption

In order to receive a Homestead Exemption on a property, certain requirements must be met. Most states require that you own the property but a few states, like Wisconsin, allow a renter Homestead Exemption as long as the renter pays the property tax. The occupant must be an individual, not a business entity, and use the home as the primary residence starting on January 1st of that tax year. If a person owns multiple properties, like vacation homes, only the primary residence can receive the exemption.

As long as the dwelling is the legitimate residence of the person, many different types of structures qualify. Houses, cabins, mansions, mobile homes, apartments and condominiums are all considered homesteads. A homestead can even be located on leased land, like a trailer park, as long as the person owns the actual structure.

Creditor Protection Homestead Exemptions

The other type of Homestead Exemption protects people from losing their home from debts owed to creditors. As with the tax exemption, a person can only claim Homestead Exemption on his/her primary residence and each state has its own rules and regulations. Some states give automatic homestead exemption, and in other states one must submit a Declaration of Homestead form.

Many states like Texas and Florida have very broad protections with no limit on the amount protected. Most creditors cannot force the sale of the home to satisfy the debt owed. There are a few exceptions where certain creditors can bypass the Homestead Exemption and force the sale of the home. Unpaid taxes, missed mortgage payments, and mechanic’s liens are all actions where the property may be forced into foreclosure to pay the debt. A mechanic’s lien is when someone who has supplied labor or materials to improve the property goes unpaid and places a lien on the property.

Other states have more limited protection where general creditors can force the sale of the home. In Massachusetts the Homestead Exemption protects homes up to $500,000. Only if the debt owed is over $500,000 can a general creditor force the sale. If the amount is over the limit and the creditor decides to force the sale of the home, the home owner gets to keep the first $500,000.

Right of Occupancy

In the event the owner of the property dies, the Homestead Exemption allows the surviving spouse the right to occupy the home for life even if the property is left to someone else, such as the deceased’s children. For example, a husband passes away and leaves his house that he owned before his current marriage to his children from the previous marriage. The current wife has the right to live in the house for the rest of her life even though her step-children own the house. As long as no debts are owed, like unpaid taxes, forcing the foreclosure of the home, she cannot be forced out.

Summary

There are different types of Homestead Exemptions and each state has its own sets of rules. It is important to know the differences between the types and that these exemptions are not always automatic. With the numerous laws that vary from state to state, it may be best for some people to contact a professional to discover what they are actually eligible for.

Additional Resources

Rehan Alimohammad is an Attorney and CPA.  Our office handles all tax law and immigration law issues.  In the past year we have successfully trained over 200 people, including Attorneys, CPA’s, and Enrolled Agents, on how to successfully resolve cases with the IRS and State Tax Agencies.  Please visit our website at www.attorneyrehan.com, or call our offices at (281) 340-2074 or (800) 814-3920. This article is not meant as specific advice regarding a person’s individual case.  An attorney should be consulted.  This article does not create an Attorney-Client relationship.   Any tax information or written tax advice contained herein (including any attachments) is not intended to be and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer.  (The foregoing legend has been affixed pursuant to U.S. Treasury Regulations governing tax practice.)

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