What Determines a Homestead Exemption Amount?

The amount of a homestead exemption varies by state. Not all states have homestead exemptions. In some states, a homeowner is automatically entitled to a homestead exemption on his primary residence. In other states that have homestead exemptions, the exemption is not automatic and homeowners must file for the exemption. Rules regarding homestead exemptions vary considerably from state to state.

When a family faces financial hardship and loses their home, the homestead exemption provides the family with funds to help them get into another home. The exemption protects a portion of their home’s equity from creditors. A homestead exemption is a life estate. If a homeowner sells his house, any homestead exemption he had on that property ends when it transfers to the new owner. A person can only hold one homestead exemption at a time. Many states have additional regulations limiting homestead exemptions.

An example of how a homestead exemption might work is the family whose house sells by the court to satisfy creditors. If the exemption in that state is $5,000, and the house sells for $100,000 and has a $50,000 mortgage, this means the lender holding the mortgage lien receives $50,000, the family receives $5,000 and the remaining funds go to pay off the family’s unsecured debts.

Actual equity in the home is one factor in determining the amount of funds obtained through a homestead exemption. Equity is the difference between the property’s current market value and any liens on the property. The homestead exemption does not protect the home from claims by the mortgage holder or property tax liens on the property. For example, if the house sells for $100,000 and the amount due for the property’s mortgage loan and unpaid property tax is $100,000, nothing remains for the displaced homeowner. In effect, the exemption amount is zero.

How homestead exemption amounts are determined varies by state. Some states specify a specific exemption amount, such as a flat fee of $100,000 or $5,000. A percentage of the property’s value might determine the exemption amount. Some exemption programs consider the age or disability of the person applying for the exemption. In some states, the exemption amount might increase for an additional family member. Each state with a homestead exemption has its own way of calculating the exemption amount and establishing qualifying factors.