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After you buy a home, the first thing that probably comes to mind is how much it’s going to cost you every month. There’s the monthly mortgage payment, insurance, repairs, maintenance, utilities, etc.
And don’t forget the taxes.
Regardless of where you live, you will owe property taxes. Fortunately, most states offer an easy way to reduce your property tax bill. It’s the homestead exemption.
Homestead tax exemption laws (and other property tax exemption laws) vary by state and can help you save money on your property taxes. How much you can save and eligibility requirements will vary.
Let’s take a closer look at what a homestead exemption is, how it works and how you can apply to get a discount on your real estate taxes.
The Homestead Exemption: What Is it and How Does it Work?
A homestead exemption sets a legal limit on how much of your property’s assessed value is subject to property taxes. Because homestead exemption laws vary by state, the amount of money protected under the homestead exemption will depend on where you live. And every state has the power to determine who is eligible for a homestead exemption.
But before we dive into the exemption, here’s a quick refresher on how property taxes work.
How much do property taxes cost?
Property taxes are based on the assessed value of your home, which can vary depending on the state, county or municipality (city or town) you live in.
Alabama, which has some of the lowest property taxes in the U.S., charges around 42 cents per $100 of appraised value in property taxes. The state also requires homeowners to pay taxes on 20% of the real value of their homes.
In New Jersey, where the property taxes are some of the highest in the U.S., a home is assessed at 100% of its fair market value, and the average tax rate is $2.77 per $100 of the appraised value.
If you owned a $200,000 home in Alabama, your annual property tax bill would be $1,680. If you owned that same home in New Jersey, you’d pay $5,520.
A homestead tax exemption example
Let’s say you bought a home with an assessed value of $300,000, and your state’s average property tax rate is 1% of the home’s value. Your annual tax bill would be $3,000.
If you were eligible for the state’s $50,000 homestead tax exemption, your assessed property value would be reduced by $50,000, dropping the total taxable value of your home to $250,000.
Your 1% property tax rate would be based on the $250,000 amount, not $300,000, dropping your property tax bill to $2,500 – and saving you $500 a year.
Depending on your home’s value and your state’s exemption, you could save hundreds or thousands of dollars each year.
Protection against unsecured creditors
Though many homeowners focus on the tax savings a homestead exemption provides, another benefit is the homestead protection against unsecured creditors.
The homestead protection won’t apply if you default on your mortgage because a lender is a secured creditor. Your mortgage agreement gives them the right to foreclose on your home if you default.
If you owe a non-mortgage lender money and they put a lien on your home, a homestead exemption may protect some or all of your home’s value against the creditor’s claims.
Not all states offer protection against unsecured creditors. It may depend on several factors, including the amount of equity you have in your home and the size of your property.
Who Is Eligible for a Homestead Exemption?
Only your primary residence is eligible for the homestead exemption. Vacation homes, investment properties and second homes don’t qualify.
In some states, anyone can qualify for a homestead exemption. Other states may only offer homestead exemptions to certain groups of homeowners, including:
- Homeowners with disabilities
- Lower-income homeowners
- Homeowners age 65 and older
Visit your state or local government’s website to learn more about the eligibility requirements for the homestead exemption.
Which States Have the Homestead Tax Exemption?
Currently, 48 out of 50 states offer homestead exemptions. Pennsylvania and New Jersey are the two states that don’t offer homestead exemptions.
Homestead exemptions will vary by state.
- Alabama has a $4,000 exemption for homeowners under age 65.
- Texas offers a standard $40,000 exemption, plus an additional $10,000 exemption for homeowners age 65 and older.
- Georgia offers a standard $2,000 exemption, a $4,000 exemption for individuals 65 and older and a $60,000 exemption for disabled veterans or surviving spouses.
Even if a state doesn’t offer a homestead exemption, the state’s local governments (including those in Pennsylvania and New Jersey) may offer a homestead exemption on county taxes.
How Do You File for a Homestead Exemption?
The homestead exemption application process varies by state. You may be enrolled automatically, or you may need to complete an application. You can usually apply by calling your county’s homestead exemption hotline. Keep in mind that the annual deadlines to file for a new homestead exemption are based on when your tax year starts.
After you’re approved for a homestead exemption, you’ll never need to reapply unless you sell the home or it no longer serves as your primary residence.
Discount on Your Tax Bill
Property taxes can be expensive. If you own your primary residence, you may be able to get a discount on your tax bill by filing for a homestead exemption. Check your county’s website. You may be eligible to catch a break on your real estate taxes. In many cases, filling out a simple form can save you hundreds or even thousands of dollars a year.
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The Short Version
- A homestead exemption sets a legal limit on the portion of your home’s value that is subject to property taxes
- The homestead exemption application process varies by state. You may be enrolled automatically, or you may need to complete an application
- Georgia offers a standard $2,000 exemption, a $4,000 exemption for homeowners age 65 and older and a $60,000 exemption for disabled veterans or surviving spouses
Georgia Department of Revenue. “Property Tax Homestead Exemptions.” Retrieved July 2022 from https://dor.georgia.gov/property-tax-homestead-exemptions
Alabama Department of Revenue. “Property Tax Incentives.” Retrieved July 2022 from https://www.revenue.alabama.gov/tax-incentives/property-tax-incentives/
New Jersey Department of Community Affairs. “Property Tax Information – Abstract of Ratables 2021.” Retrieved July 2022 from https://www.nj.gov/dca/divisions/dlgs/resources/property_tax.html
Alabama Department of Revenue. “Homestead Exemptions.” Retrieved July 2022 from https://www.revenue.alabama.gov/property-tax/homestead-exemptions/
Texas Comptroller of Public Accounts. “Residence Homestead Exemption Frequently Asked Questions.” Retrieved July 2022 from https://comptroller.texas.gov/taxes/property-tax/exemptions/residence-faq.php