The Tax Exemption That Can Save Thousands for Buy & Hold Investors

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One common way for rental property investors to qualify for their first few rental properties is to purchase a home as their primary residence, live in that home for one year, and move out after the year is up — and then turn the home into a rental property.

If you’re a buy and hold rental investor and this is your strategy, don’t forget that during the year that you live in that home, you may qualify for the homestead exemption.

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What is the Homestead Exemption?

The homestead property tax exemption is a government-approved exemption for homeowners that allows you to lower your home property taxes by decreasing your home’s taxable value. The exemption removes a portion of the value of your property in order to lower your taxes.

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Types of Homestead Exemptions

Homestead exemption laws vary by state. Let’s say, for example, that you’re interested in investing in a home in Texas. There are three primary kinds of homestead exemptions that would affect you.

  • Type 1: Homeowners who qualify for the homestead exemption are eligible to receive a minimum exemption of $15,000 on their home’s value for school district taxes.
  • Type 2: Homeowners may apply for a 20% exemption, which lowers the value of the home to lower your annual property taxes.
  • Type 3: Homeowners may be eligible for additional exemptions depending on your particular school district, county, city, or if you reside in a special district. Each body of government makes their own decisions regarding which exemptions they will offer and at what percentage rate. Contact your local governing bodies to discover which other homestead exemptions (if any) you may qualify for in addition to the percentage exemption.

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Is the Homestead Exemption Worth it?

Numbers don’t lie. A few minutes of filling out paperwork could equal thousands of dollars in savings. Let’s say, for example, that you usually would pay 2.5% in taxes on the value of your home. On a $250,000 home, this equals paying $6,250 annually in taxes.

With a homestead exemption of 20%, you would only have to pay property taxes on $200,000 of home value, or $5,000 per year. Simply by qualifying for this exemption, you would save yourself $1,250 annually on property taxes.

Who Qualifies for a Homestead Exemption?

Again, homestead exemptions vary by state and type. Let’s say, however, that you bought a house in Houston last year, with the intention of developing it into an investment property while you maintained the residence as your primary location.

If as of January 1, 2016, you are the homeowner of single-family home, townhouse, or condo, and you’re using that property as your primary residence, then you are eligible for a homestead exemption.

In most states, in order to apply, you’ll simply file the appropriate paperwork with your county tax assessor. This generally includes:

  • Filling out a homestead exemption application
  • Providing a photocopy of your current driver’s license with that property’s address listed
  • Providing a copy of your vehicle registration or current utility bill that shows the property address
  • Filing the application and paperwork between January 1, 2016 and April 30, 2016, with mailed applications postmarked no later than April 30, 2016

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The Homestead Cap: an Additional Benefit

Another advantage of the homestead exemption is the homestead cap. If your property is in an appreciating housing market (more than 10% appraised value per year), the homestead cap limits the increase in the appraised value of your home and can save you quite a bit of tax money. A homestead cap would become available to apply to your homestead exemption at the beginning of the second year that you qualify for a homestead exemption.

Related: The Ultimate Guide to Real Estate Investment Tax Benefits

If you qualify for the cap, according to most homestead cap laws, your appraised value of your property may not be greater than this year’s market value or last year’s appraised value, with an additional 10% of any value created through home improvement in the previous year.

Save Thousands in Taxes

Homestead exemptions and homestead caps are fairly easy to obtain and may save you a substantial sum in taxes. It certainly doesn’t hurt to apply. Call ahead to your city’s tax assessor and ask which documents they require for a homestead exemption application. By taking a few hours to fill out the paperwork and submit the correct documents, you could very well save yourself thousands of dollars on your investment property.

Investors: Have you used the homestead exemption before? Any questions about the laws surrounding this tax break?

Let me know with a comment!

About Author

Ben Lemieux

Ben Lemieux is currently the Co-Owner of Surge Homes, a company that develops land, builds townhomes and condominiums, and offers real estate sales and marketing services for all of its communities in and around Houston, TX.

19 Comments

  1. Byron Bohlsen

    Yes homesteading is a must.

    It is important to know that homestead does not modify your home taxes the current calendar year unless you apply before the deadline at the beginning of the year. – If you only plan on staying for exactly one year but buy right after the deadline you wont get to claim homestead for that year and the next year you will only get to use it for a few months since you are moving (Unless it stays on for that entire following year after you moved but I don’t think so?).

  2. In Illinois, you can receive the “owner-occupied exemption” on your single family rentals. You never need to live in them. The tenant has a “leasehold interest” that qualifies for this exemption. Yearly we save about $36K submitting the appropriate paperwork for this. If you live in IL and are unaware of this, you can reach out to me at “reo AT RentFreeport.com”.

  3. Pretty good for states that offer that option. SC does not so be prepared to factor that into your rental rate if you invest here. Owner occupied get assessed at 4% while all other properties( treated as businesses) are assessed at 6%. Illinois seems to be the better place to own rentals

  4. I was wondering if a husband and wife can claim two separate residences and get homestead exemptions for two separate houses. Has anyone tried this? I was thinking of moving into one of our rentals and did not know if the property tax board has a stance on this.

  5. margaret smith on

    In Florida, you can only homestead one primary home. If you move out, and do not inform the tax people, you might be able to get away with that- until you put a homestead designation on another property, anywhere in the US. We occasionally get a politician who homesteads here and, say, Washington DC- and when they are “busted”, all heck breaks loose- Illegal!

    Remember also that property insurance and liability will designate the property as a personal residence, a vacant house, a builder’s risk, or a rental- If you don’t stay accurate with the current/consistent/ correct with all that, you will be paying premiums for nothing. When it comes time to make a claim, again — “Busted!”

    So at least for Florida, this one year idea really doesn’t make sense. I wish it did!!!

    • rich urban

      Yes, definitely something to be careful with in Florida. I will add that If you get busted,, there are hefty fines for each year that you were illegally claiming the Homestead Exemption. I’ve seen houses with $30,000-$50,000 in homestead fines because they look back and assess the fine based on the past years.

  6. T a

    THIS IS BAD INFORMATION!!! This type of misinformation will thrust your finances into the abyss and you will find yourself in deep trouble. Take heed: State Homestead Tax Exemptions are for those who own/occupy/primary residence. Not for income properties. Expect to answer to the County Tax Appraiser if you are caught scamming this system. They will find you when you cannot claim the property as your primary residence. You could pay back-taxes and fines for every year you mis-represented the property. Best case scenario, your property tax will increase 50-80% when the Exemption is lost. BEWARE!!!!!

    • Ben Lemieux

      Hi T A, it’s definitely not illegal to claim this tax exemption on your income properties if you first used them as a primary residence. But if you have concerns about the legality of qualifying for this tax exemption in your state, you should definitely do your own research as the tax exemption rules can vary from state to state.

    • Chandra Yates

      You are absolutely correct. I own rental properties in 3 states. In all 3 states you CANNOT claim homestead on a rental property. We lived in one of the properties for 2 years prior to renting it out. Our property manager advised us to drop the homestead when we moved due to us claiming it on our new house even though it was in another state. Also, when we purchased our first property we used the current assessment figures not realizing they included homestead. Imagine our surprise a year later when the homestead dropped off and the taxes jumped 40%.

  7. Steve Rogers

    In my county in MN, if you have property that is non-homestead, your taxes are 1.65% of the EMV. (At least the properties in my price range) If your property is homestead you get up to a 40% reduction on the EMV and they tax you .86% – 1.3% (30k -120k range) I have seen my taxes go from $363 when it was my primary residence to $1066 when I turned it into a rental. This is something new investors need to keep in mind. It was a shock for me:-)

    • Brock Adams

      In my county of SC, you will see taxes for primary residence for 1500 Sq ft. @ about 700/yr whereas if you rent the same house it will be about 2700/yr. Appreciate MN even if you have more cold weather than we do.

  8. Brian Battee

    I am new to this and we are currently saving for a down payment for our first rental. Financial advisor recommended BP to help educate us. We currently live in Maryland and pay $4400 in property taxes. If the Homestead act is that easy, why does anyone pay full property taxes on their primary residence? Can anyone qualify regardless of income or property value?

    • Brock Adams

      BP offers great education but ALWAYS continue to weigh all information as noted in previous comment by T.A.. When you purchase that rental you will most likely have a form at closing that goes to the county the property is located in and since it is not your primary residence, it will not receive the benefits of homestead. Hence your property taxes on that property will be higher . “A homestead is the one primary residence of a person, and no other exemption can be claimed on any other property anywhere, even outside the boundaries of the jurisdiction where the exemption is claimed.”
      In some states, homestead protection is automatic. In many states, however, homeowner will not receive the protections of the law until they file a claim for homestead exemption with the state. In my county in SC you only get a homestead on primary residence and I am sure it is true everywhere else. Good Luck on your rental purchases but factor the higher taxes on that property or it will cost you

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