A homestead exemption is a law you can take advantage of to shield your main residence from some property taxes. In the event of your bankruptcy or other credit problems, you can also use the exemption to protect your property from seizure by creditors. The specifics of the homestead exemption vary greatly from state to state, with some offering unlimited protection and others offering no exemption at all.
A homestead exemption for tax purposes allows you to deduct a portion of the value of your home when it comes to assessing various taxes. Under homesteading tax laws, if you have a home worth $200,000 and you qualify for a $20,000 exemption, you would pay tax as if your home was worth $180,000.
For example, in Texas, all homeowners qualify for a $15,000 homestead exemption for the purposes of paying school tax. Harris County, Texas also offers homeowners an optional $20,000 exemption for county taxes. Homeowners must file an application between January 1 and April 30 for homestead tax exemption in Texas. Additional twists to the law, such as greater exemptions for those over age 65, apply in both Texas and in other states. Consulting with the taxing authority in your state is the best way to keep abreast of the exemptions that apply directly to you.
The homestead exemption means something almost entirely different when it comes to protecting your assets from creditors. If you file bankruptcy, have a judgment against you or otherwise have a legal liability to creditors, the homestead exemption can protect your home from seizure. According to Phoenix, Arizona attorneys Philip R. Rupprecht and Lisa B. Querrard, where you live is critical when it comes to your homestead exemption, as four states -- Rhode Island, Delaware, New Jersey and Pennsylvania -- along with the District of Columbia have no homestead exemption whatsoever. On the other end of the spectrum, five states -- Texas, Oklahoma, Iowa, Kansas and Florida -- have unlimited homestead exemptions.
The homestead exemption is critical in Chapter 7 bankruptcy because any assets you can't protect using exemptions are subject to liquidation. In a state with no homestead exemption, such as New Jersey, you may lose your entire home to creditors. In Florida, on the other hand, you could have a multi-million dollar mansion and creditors would not be allowed to get a single cent out of it.
If you can't protect your home using the homestead exemption in Chapter 7 bankruptcy, you may be able to keep your home by filing Chapter 13, according to Los Angeles, California attorney Justin Harelik.