Eligible homeowners who apply for the homestead credit can get property tax relief.
We’ve said it before, but it’s often cheaper to buy than rent. But once someone becomes a homeowner, they may come to find that there are some new things they have to pay for—things they didn’t have to worry about when they were renting. Like property taxes. But this added expense shouldn’t scare people away from buying a home just yet. There’s a little thing called a homestead credit that’s intended to lighten the burden of property tax payments.
It’s just another benefit that can help make homeownership affordable, and a homeowner who pays property taxes on their primary residence might want to consider taking advantage of this program. However, it’s important to note that not all homeowners are guaranteed to save money via the homestead credit program or to even be eligible for it. It’s best for a homeowner to start by contacting their local government and research the homestead credit rules specific to their individual situation.
The homestead credit is just another perk to homeowners and another benefit that can help make homeownership affordable.
What is PITI?
Before we get into the details of the program, let’s talk about PITI. A mortgage payment is essentially made up of four things: principal, interest, taxes, and insurance (abbreviated PITI). The principal and interest pieces of that equation concern the home loan. The insurance part, of course, is what’s paid to the borrower’s homeowners insurance company. Then there’s taxes. This part of a monthly mortgage payment goes toward property taxes—that’s where the homestead credit comes in.
HOMESTEAD CREDIT FOR DUMMIES
“Homestead” is just an old-fashioned word for a home—more specifically, a homeowner’s primary owned residence. In the U.S., the homestead tax credit law is intended to limit the amount of tax assessment increase that can be imposed on homeowners. The program is currently available in 47 states, six of which have unlimited exemption, others limit it to a percentage or a fixed amount.
The homestead credit may protect at least some of a home’s value from creditors, property tax increases, and even life events like the death of a spouse by putting a cap on the assessment increase for a period of time. This credit (also called homestead tax credit or homestead tax exemption) can have a significant impact on how much homeowners save on property taxes, regardless of their property value or their income level.
HOME VALUES AND TAX ASSESSMENTS
Let’s take a step back for a minute. The amount a homeowner pays for property taxes is based on factors that impact their home’s market value. When home values rise, property taxes usually do so too.
One major factor that can affect a home’s value is home renovations. And not just renovations a homeowner makes to their own home, but those their neighbors make to their homes too. Picture Homeowners A and B. If Homeowner A’s neighbor down the block Homeowner B builds an addition onto their home, it not only increases the value of Homeowner B’s home, but Homeowner A’s too, and that of the whole neighborhood. Additionally, while making improvements around the house can increase the home values in the surrounding neighborhood, it can increase the property taxes of the area as well.
Local demands can also affect home values and property taxes. Since property taxes often fund public services in the community like public schools or parks, homeowners in the area could pay higher property taxes to support these local establishments. Similarly, if there’s a lot of real estate investing going on in the area, homeowners might have to pay more in property taxes to help fund those initiatives.
Making improvements around the house can actually increase the value of the surrounding neighborhood.
Property taxes get assessed every so often. The frequency of this depends on a homeowner’s local government, but they can be reassessed annually, every five years, or only when the home is sold or refinanced. Property taxes are assessed based on an assessment rate (also called a mill levy) set by the state. But just what is evaluated when a piece of property is assessed for taxes?
An official tax assessor will compare the market value of the home to similar properties in the area. The home’s worth will then be determined by the amount that those similar, nearby properties were recently appraised or sold for. If home renovations and local demands are on the rise, the property taxes of one home, as well as those of similar homes in the area, could go up. This is where the homestead credit program can come in and cap the property assessment increase for a period of time to give the homeowner a financial break.
The homestead credit can cap the property assessment increase for a period of time to give the homeowner a financial break.
HOMEOWNERSHIP HAS ITS PERKS
Homeowners across the country save money and benefit from the homestead credit. There is an application process which helps verify that the property owners only receive the benefit of this credit on their one principal residence. In addition, once a person submits the application, homestead credit eligibility stays in place as long as the home for which they’re applying remains their primary residence.
While there are different rules and processes for every state, the overall benefit remains the same: homeownership has its perks. And saving money on property taxes using the homestead credit is one of them. If there’s money to be saved, it can’t hurt to do some research and consider filling out an application. Savings via the homestead credit is not guaranteed to every homeowner, so it’s important to talk to your local government or visit your state’s .gov website to find out if you’re eligible and where to apply.
This blog post is intended for educational purposes only and is not to be taken as advice or as a guarantee of savings. We recommend you consult your financial advisor or legal counsel before you make any financial decisions toward purchasing a home or applying for the homestead credit.