Most homeowners aren’t experts on all the details of the laws affecting their homeownership, and it doesn’t help when two rather different legal benefits have confusingly similar names. In California, the homeowners’ exemption and the homestead exemption may sound alike, but they are far from the same. One provides a slight property tax break, while the other provides protection against judgment creditors, and understanding the difference can be critical for someone owing a debt for a legal judgment.
The Homeowners’ Exemption – A Property Tax Break
At minimum, the California Homeowner’s Exemption is a simple, small break on your annual property tax bill. For purposes of computing the annual property tax assessment, the California Revenue and Taxation Code currently allows homeowners to deduct $7,000 from the taxable value of a qualifying owner-occupied residence. This comes to about $70 in annual property tax savings, given an approximate 1% property tax rate.
The home must have been the principal residence of the owner as of January 1 of the tax year in question to qualify for the exemption. New owners automatically receive an exemption claim form in the mail; there is no cost to file for the exemption. A new owner must file by February 15 to claim the full $7,000 exemption. Owners receive 80% of the exemption ($5,600) for that year for forms filed after February 15 but before December 10. It is only necessary to file once for a home. Once the homeowners’ exemption is granted, it remains in effect until the owner no longer occupies the house as their principal place of residence or title to the property changes.
In recent years in California, the Homeowner’s Exemption can have a more significant effect. Under Proposition 19 (**Hema please hyperlink to my previous article about this on our blog**), when a property passes between parents and children, the property tax may remain the same if both the parent and the child claim the home as their primary residence, within one year of the date of transfer. To account for whether a home is in fact a primary residence, the County Assessor will look to see whether both the parent and the child have applied their respective Homeowner’s Exemption to the same property. Because you can only apply your Homeowner’s Exemption to one home at a time, this is the home that will be treated as your primary residence. This means if you move homes, it is important to ensure that the County Assessor knows to which home you wish to apply your Homeowner’s Exemption.
The Homestead Exemption – Partial Equity Protection for Your Home
On the other hand, the Homestead Exemption is meant to ensure that a judgment debtor—someone who owes money in accordance with a legal judgment against them—will still have a place to live by protecting a portion of the equity of their home in California from being used to pay a judgment lien on the property. California’s Homestead Exemption law changed in 2021, increasing the baseline exemption amount considerably from previous law. Now the protection covers the greater of $300,000 or the countywide median sales price of a single-family home in the calendar year prior to the year in which the exemption is claimed, not to exceed $600,000, adjusted annually for inflation. Based on the changes to the California Consumer Price Index for the prior fiscal year, the minimum exemption for 2023 is $339,189 and the maximum is $678,378.
The Difference Between Automatic and Declared Homestead
There are two kinds of homestead exemptions: an automatic homestead and a declared homestead. To be clear, they both apply to your primary home – not to commercial properties or to second homes.
For an automatic homestead, a homeowner does not need to do anything other than live in the home. The automatic exemption protects the homeowner’s equity in the property – up to the maximum amounts listed above — in cases where the creditor is requesting a forced sale. In other words, if a creditor is trying to force the sale of your home in order to collect a judgment against you, they cannot do so if your equity in the home is equal to or less than your homestead exemption. If your equity exceeds your homestead exemption, then the creditor can force a sale of your home and obtain the excess equity amount, thus guaranteeing that you would retain your equity equal to your homestead exemption.
An automatic homestead applies to forced sales by creditors. But what happens if you sell your home voluntarily?
By contrast, a declared homestead exemption, in which the homeowner proactively must file a legal form with the County declaring the qualified property, provides additional equity protection for the homeowner, especially in situations involving a voluntary sale. This ensures the full amount of the legal exemption is protected whether the homeowner is forced to sell by their creditors or chooses to sell the property themselves. In other words, if you sell your home, your homestead exemption is protected even after the sale if you meet 3 criteria:
- You sell your old home and buy a new home within 6 months.
- The homestead exemption amount is used to purchase the new home.
- You record a homestead exemption on the new home.
There are some additional limitations to the exemption:
- Lenders are still paid from the sale of a home.
- If the home is used as collateral for a loan, the lender retains the right to foreclose on the property and the borrower does not qualify for the Homestead Exemption.
- The state homestead exemption does not protect a home from federal actions (i.e., collections by the IRS or other federal agencies).
While no one hopes to have to use the Homestead Exemption, having the full protection the law affords is always a good idea. California homeowners with equity in their homes should certainly consider filing a homestead declaration just in case.
Protecting Your Property
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