Although most state governments receive revenue from multiple sources including sales, income and excise taxes, local governments depend heavily on the property tax. A homestead exemption is one type of program implemented by state legislatures to provide relief from residential property tax, along with homestead credits, circuit breakers and property tax deferrals. Homestead exemption laws also prevent creditors from forcing the sale of a primary residence in a bankruptcy, though the value and size of property protected under these laws varies by state.
A homestead exemption typically means that some of a home's assessed value, such as the first $50,000, is not subject to property tax. Sometimes the exemption is automatically granted to all residents, but some states require homeowners to meet criteria such as age, low income, or number of years in the home. Although assessed value is the official estimate used by most state and local governments to apportion taxation, it can differ significantly from true market value.
Homestead credits differ from homestead exemptions in two major ways. First, they usually work by providing direct rebates to taxpayers. Known as homestead rebates, the amounts can represent either a fixed percentage of each individual's tax bill or a predetermined total for all qualifying claimants. Second, homestead credits are financed by state governments. This makes them popular with local officials, who do not lose municipal revenue and face less pressure to increase assessments or find alternative bases for taxation.
Homestead exemptions and credits do not provide relief to renters. Property tax circuit breaker programs, offered by about half of the states, offer state-financed rebates to homeowners and renters alike. Circuit breaker rebates are based on household income as well as property taxes. In general, some amount of relief is triggered automatically whenever property taxes exceed a predetermined percentage of income. However, states sometimes set income or asset limits above which residents cannot qualify for circuit breakers.
Property Tax Deferrals
Property tax deferrals are the most narrowly targeted type of program. These deferrals allowing older homeowners on fixed incomes to postpone payment of property taxes and/or special assessments. Deferral programs are available in 24 states and the District of Columbia, but some states local governments may opt out of them. In addition to an age requirement, there is often an income cap for participation. This cap might be stated in dollars ranging from $10,00 to $50,000, or as a percentage of the federal poverty level.
- A Guide to Property Taxes: Property Tax Relief; National Conference of State Legislatures; 2002, p. 5-24
- National Bankruptcy Forum: What is a Homestead Exemption?
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