Buy a New Home? Don't Forget to Apply for a Homestead Exemption

If you've purchased a new home, there are a lot of things you'll need to do. For one thing, you'll have to start making mortgage payments. And you'll need to sign up for utilities, furnish your home, move your stuff in, and get your kids registered in school.

As you take care of all of these tasks, there's one other step you absolutely cannot forget. You need to apply for a homestead exemption if you're eligible for one.

What is a homestead exemption?

Homestead exemptions help homeowners to reduce the cost of their property taxes. Typically, they work by allowing you to have a certain portion of the value of your property not considered in your home's assessed value. Since your property taxes are calculated by multiplying your property's assessed value by the millage rate where you live, this reduces the amount you must pay in property tax.

Depending where you live, a homestead exemption may allow you to exempt a flat dollar amount from your home's value. Or, it may allow you to exempt a percentage of your home's value. For example, you might get to deduct $10,000 from your home's assessed value or you might get to exempt 15% of what your home is worth from its assessed value.

Either way, these exemptions can save you quite a bit, depending on the tax rate where you live -- although a percentage-based approach provides more benefit to wealthier people with costlier homes. For example, the chart below shows how a homestead exemption might affect your property taxes on a $400,000 home, assuming a 2% tax rate.

As you can see, this exemption can save you a substantial amount of money on your tax bill each year -- especially if you are entitled to a percentage-based exemption and you have an expensive home.

How to apply for a homestead exemption

Typically, you can qualify for a homestead exemption only on your primary home and only if you own and live in your house. If you are married, both you and your spouse may be eligible for an exemption. But you can only claim the exemption on one property -- your primary residence.

You will need to apply for the exemption with the local taxing authority where you live. You can check with your county or city to find the forms that you will need in order to request this tax savings. For example, for those who live in the city of Philadelphia, you can apply for the exemption online by filling out a simple form.

Generally, this involves providing information such as:

• The names of the owners of the property
• The address of the property
• Whether your property is the primary home
• Whether you claim anywhere else as your primary home
• Whether you use any portion of the property for business purposes, which could cause you to become ineligible for the homestead exemption

You will have to sign the form as well. Once you have submitted it and the exemption is processed, your tax bill will be reduced if you are approved for the homestead exemption. You'll want to do this as soon as possible after closing on your mortgage loan and moving in so you don't end up overpaying on your taxes by not claiming it.

The good news is that once you apply, you should not have to do it again unless your deed changes. Get this task checked off your to-do list ASAP so your property tax bill will be as reasonable as possible for the duration of the time you live in your home.