Exemption in Real Estate

Definition

What is an Exemption in Real Estate?

An exemption in real estate is a specific reduction on the assessed value of a property or portion of taxable income that is permitted by law. These exemptions can be applied in various ways, such as reducing the taxable value of a property or decreasing an individual’s taxable income, thereby lowering their overall tax liabilities.

Examples

Personal Exemption: Personal exemptions typically relate to income tax and can be based on the number of dependents within a household. This form of exemption lowers the taxable income, thereby reducing the amount of tax owed.
- Example: A family of four may be eligible for a personal exemption for each family member, lowering their collective taxable income.
Homestead Exemption: This exemption is offered in many jurisdictions and helps reduce the taxable value of a primary residence, effectively lowering property taxes.
- Example: If a home is valued at $200,000, a homestead exemption might reduce its taxable value by $50,000, meaning the owner is only taxed on $150,000.

Frequently Asked Questions

Q: Who qualifies for a homestead exemption?

A: Homeowners who use their property as their primary residence generally qualify for homestead exemptions, although specific eligibility criteria may vary by jurisdiction.

Q: Are personal exemptions still available on federal income taxes?

A: As of the Tax Cuts and Jobs Act of 2017, personal exemptions have been eliminated from federal income taxes, but they might still apply at the state level.

Q: Can a property have both a homestead exemption and other types of exemptions?

A: Yes, properties can often qualify for multiple types of exemptions, such as a homestead exemption and a senior citizen exemption, concurrently.

Ad Valorem Tax: A tax based on the assessed value of an item, such as real estate or personal property.
Tax Abatement: A temporary reduction or elimination of property taxes granted by local government, usually to encourage development or investment.
Capital Gains Tax: A tax on the profit realized from the sale of a non-inventory asset, such as real estate.
Assessed Value: The dollar value assigned to a property for purposes of measuring applicable taxes.

Online Resources

References

IRS. (2022). “IRS Real Property Tax Guide.” Retrieved from IRS.gov
National Association of Realtors. (2022). “Tax Incentives for Property Owners.” Retrieved from NAR.REALTOR

Suggested Books for Further Studies

The Book on Tax Strategies for the Savvy Real Estate Investor by Amanda Han and Matthew MacFarland.
Real Estate Tax Deductions by Steven Fishman.
The Tax Code as a Tool for Economic Development by Richard A. Sander.

Real Estate Basics: Exemption Fundamentals Quiz

### Can a property owner receive an exemption for a property that is not their primary residence? - [ ] Yes, any property can receive an exemption. - [x] No, generally only primary residences qualify for homestead exemptions. - [ ] Exemptions apply only to commercial properties. - [ ] Exemption eligibility is based on the property's age. > **Explanation:** Homestead exemptions typically apply only to properties classified as the owner’s primary residence. ### Is the exemption amount always the same regardless of the property's location? - [ ] Yes, the exemption amount is federally mandated. - [x] No, exemption amounts vary by location and jurisdiction. - [ ] Yes, all states follow a standard exemption amount. - [ ] No, it depends on the property's mortgage value. > **Explanation:** Exemption amounts can vary significantly by location due to differing local tax laws and regulations. ### What is the primary purpose of a homestead exemption? - [ ] To increase property taxes. - [x] To reduce the taxable value of a primary residence. - [ ] To assess new construction. - [ ] To ensure consistent statewide taxation. > **Explanation:** The primary purpose of a homestead exemption is to lower the taxable value of a homeowner's primary residence. ### Is a personal exemption the same as a tax deduction? - [ ] Yes, they are the same thing. - [x] No, a personal exemption specifically reduces taxable income, while a tax deduction can reduce total taxable income from various sources. - [ ] Yes, both apply directly to reducing the amount of tax owed. - [ ] No, personal exemptions increase taxable income. > **Explanation:** A personal exemption reduces taxable income, while a tax deduction can reduce gross income and thereby affect taxable income. ### Are senior citizen exemptions a type of exemption that can be applied to property taxes? - [x] Yes, senior citizen exemptions can reduce property taxes for qualifying seniors. - [ ] No, senior citizen exemptions only apply to income taxes. - [ ] Yes, but only for commercial properties. - [ ] No, they apply to vehicle registration fees. > **Explanation:** Many jurisdictions offer senior citizen exemptions that reduce property taxes for qualifying seniors. ### Can more than one exemption apply to the same piece of property? - [x] Yes, properties can qualify for multiple types of exemptions. - [ ] No, only one exemption can be applied per property. - [ ] Yes, but only in commercial real estate. - [ ] No, duplicating exemptions is illegal. > **Explanation:** It is common for a single property to receive various exemptions, such as a homestead and a senior citizen exemption, simultaneously. ### How often must a homeowner typically apply for a homestead exemption? - [ ] Annually - [x] Once, upon initial application, unless circumstances change. - [ ] Every five years - [ ] With each tax payment > **Explanation:** Homeowners generally apply for the homestead exemption once upon purchase or establishment of the primary residence, with adjustments required only if significant changes occur. ### Do exemptions apply to rental income property in the same way they apply to primary residences? - [ ] Yes, exemptions apply equally to all real estate. - [ ] Different rules apply by locality. - [x] No, exemptions like the homestead exemption typically do not apply to rental properties. - [ ] Only if the landlord lives on the property occasionally. > **Explanation:** Exemptions like the homestead exemption are usually specific to properties used as the owner's primary residence, in most cases not applicable to rental income properties. ### How does receiving a property tax exemption typically affect the property's market value? - [ ] It increases the property value automatically. - [ ] It decreases the market value. - [ ] It has no effect on market value. - [x] The exemption affects only the taxable value, not the market value. > **Explanation:** Exemptions reduce the assessed taxable value of a property but do not impact its actual market value. ### What must homeowners primarily ensure to qualify for most property tax exemptions? - [x] Use the property as their primary residence. - [ ] Own more than one property. - [ ] Work within the city limits. - [ ] Rent portions of the property. > **Explanation:** To qualify for most property tax exemptions, homeowners must use the property as their primary, primary residence.