Homestead Exemption

A statute that places some limitation on a property, either in the property or in the area, which may be claimed as a homestead

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What is a Homestead Exemption?

A homestead exemption refers to a legal provision designed to protect the family home from the reach of certain classes of creditors or to prevent circumstances that result from the homeowner’s death or alienation by the owner without the spouse’s consent. The principal objective of homestead exemptions is to act as a security to the family members by providing some independence and stability measures.

Homestead Exemption

In addition to attracting settlers to areas in which homes are accorded maximum protection, homestead exemptions encourage homeownership. They provide tax relief to homeowners as well by sheltering a certain amount of property from tax.

Summary

  • A homestead exemption is a statute that places some limitation on a property, either in the property or in the area, which may be claimed as a homestead. 
  • Homestead exemption only applies to the owner’s primary homes and protects them from unsecured creditors.
  • The state homestead exemption is somewhat misaligned when it comes to protection against bankruptcy since the federal bankruptcy law only protects homes whose held equities do not exceed $25,150 for any litigation initiated after April 1, 2019.

How a Homestead Exemption Works

Homestead exemption laws are found in most states in the United States, although their application and level of protection provided vary by state. A homestead exemption applies only to the owner’s primary residence and not to other properties or even residences. The exemption must be re-filed if a spouse shifts his or her primary residence.

The limitations placed on the primary homes are commonly expressed in monetary value, which varies by state. A restriction on an area often accompanies a money limitation, which also varies in the size of acres, and habitually allows a much larger acreage for a rural homestead.

Homestead Exemption

Exemption from Creditors

Different states impose homestead exemption laws differently. Although acreage limits may apply for the protected homes in some states, a few states offer unlimited financial protection against unsecured creditors for the home.

A limitation of protection against creditors ranges from $5,000 to $500,000 or $30,000 to $50,000. The protection limit is for the homeowner’s equity rather than for the value of the home. The primary home’s equity is taken as the difference between the balance of the home mortgage and other transaction costs, subtracted from its value.

Creditors cannot benefit through the forced selling of a home whose equity is less than the required limit. On the other hand, a homeowner may be forced to sell, though keeping a portion of the yield, if the equity held is less than the limits.

Homestead exemption protects homeowners only from unsecured creditors who may seek to compensate claims using assets and not secured creditors, such as banks that require a mortgage on a home to self-insure themselves.

Exemption from Bankruptcy

Case laws arising from bankruptcy-related homestead exemptions those of any other aspect of homestead exemptions. The federal bankruptcy law protects a domicile from sale if its held equity does not exceed $25,150 for bankruptcy petitions filed after April 1, 2019. The statute expressly states that the trustee in the bankruptcy shall be vested, as of the time the petition is filed. For cases occurring between April 1, 2016 and March 31, 2019, the exemption is $23,675.

Homeowners may be required by the local statute to file a declaration before the home is exempted from a declaration, failure to which bankruptcy immunity is rendered null and void. It is explained by the fact that the trustee is placed, as of the time of instituting of the petition, in the position of a creditor holding a lien on the bankrupt’s home.

Property owners that are compelled to use state limits are considered more favorable. However, a few states permit either the application or the federal limit to be used. One of the consequences of such state policies is that individuals declared bankrupt in states with no homestead exemptions – including New Jersey and Pennsylvania – can be protected using federal limits even if the state homestead exemption exists.

Exemption From Taxation

The local government protects the debtor’s property to the extent of denying itself the right to collect or levy taxes, depending on local state laws. The assessed value of the home determines the homestead tax to be applied. Usually, it is the role of the local government tax assessors.

A property tax can either be a fixed amount or a ratio of the home’s value. The homestead tax exemption provides tax cuts, depending on the state. However, the exemptions are not available to low-income renters who, on most occasions, depend on tax relief. One of the benefits of such exemptions is that the surviving spouse can continue living in their homes following a reduction in income as a result of after incapacitation or death of a partner.

Special Considerations

In the instance of a family or business emergency that requires the homeowner to use the capital invested in the property, it is advisable to sell it, probably under the conditions of a distress sale.

In rare circumstances, the property owner may sell it with an option to repurchase. However, such an approach is plagued with many challenges from the purchaser’s standpoint that it will not ordinarily be available.

Related Readings

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

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