Homestead is a term that is used to refer to the primary residence of a family or person, such as a home. Additionally, many states consider affixed improvements to the primary residence, such as a barn or pool, as part of the homestead.
A homestead exemption is the legal mechanism that protects that primary residence and adjoining land from a forced sale by creditors, to satisfy property taxes or creditor obligations. It generally applies even in cases where the person does not have enough assets to satisfy all of the claims on the property.
Historically, homestead exemptions were designed to provide shelter and support to a surviving spouse following the death of their spouse and loss of that spouse’s contributing income. The main purpose now is to ensure that a debtor and their family have means of support and do not become wholly dependent on the state.
Generally, any person that owns and dwells in a home may claim a homestead exemption. A homestead exemption is an automatic right in most U.S. states. If it is not automatic in your state, the exemption is often obtainable through filing a claim with your state, in order to obtain it.
This is not true for every state however, as both New Jersey and Pennsylvania do not offer homestead protection. Therefore, it is important to research your state’s laws regarding homestead exemptions, as some states offer 100% protection of a home, while others offer none.
The homestead exemption applies so long as the property is being used as the principal place of residence by the person dwelling there. Typically, the person who claims a homestead exemption is the surviving spouse and minor children, when the head of the household dies. Importantly, since the homestead exemption applies to a person’s primary residence, no exemptions can be claimed on other owned property.
As noted above, the amount of the value of your home that is protected by the homestead exemption is different for each state. A federal exemption system also exists. As for the amount that a homestead exemption is worth, the value is typically determined by a variety of factors.
These factors may include:
- The number of people residing in the household;
- Whether the person claiming the exemption is married or single;
- The head of household’s income; and
- Whether the primary residence is in a rural or urban area.
For states such as Texas, homeowners may exempt an unlimited amount of their home or other property covered by the homestead exemption. Typically, homestead exemptions offer a fixed discount on taxes, such as exempting the first portion of the assessed value of the home, with the remainder being taxed at a normal rate.
For instance, if a single person claimed the homestead exemption in California, they would be able to exempt up to $75,000 of their home’s assessed value. Thus, if that single person had a home valued at $100,000, they would only be taxed on $25,000 (their home’s assessed value of $100,000 less California’s homestead exemption of $75,000).
Because some states provide better homestead exemptions than others, the federal government recognized that people could attempt to shield their assets by purchasing homes in states with more favorable homestead exemptions. An example of this is Texas’ unlimited homestead exemption. Thus, federal law placed a domicile requirement on the homestead exemption.
In order to utilize your state’s homestead exemption, you must have purchased the home that you are claiming the exemption on at least 1215 days before filing for bankruptcy. If you are unable to satisfy the domicile requirement, then federal law will limit the amount of the homestead exemption you may claim, regardless of the exemption amount outlined by your state.
Importantly, homestead exemptions do not protect a person’s home from all creditors. For example, secured creditors, such as the bank who holds the mortgage on a home, will still be able to recover for failure to make timely payments on the home.
Additionally, a mechanic’s lien will also be able to be enforced, as well as court orders of child support or spousal support. However, homeowners are protected from unsecured creditors who seek the value of a person’s property in order to satisfy their claims against that person and their assets.
As can be seen, homestead exemptions vary drastically depending on the state in which the exemption is being claimed. Further, the value of the exemption further varies according the various factors outlined by state statute.
Therefore, if you are facing bankruptcy and have creditors that are making claims on your property, you should immediately consult with a well qualified and knowledgeable real estate attorney. An experienced bankruptcy attorney will be able to explain your state’s laws on homestead exemption and help you make a claim to protect your assets if your right is not automatic.