We continue our series on property taxes. Today we will focus on the homestead exemption.
Simply put, the homestead exemption is a way to reduce property taxes for residential homeowners. What is does is exempt a certain percentage of a home or homestead’s value from property taxes. The legislature sets the homestead exemption rate and then applies it to the market value to determine the taxable market value. There is a similar exemption for commercial property called the comstead exemption.
The Institute on Taxation and Economic Policy has a great short paper explaining the homestead exemption. They explain that there are two types of homestead exemptions: flat dollar and percentage exemptions. Flat dollar exemptions are calculated by exempting a specified dollar amount from the value of a home before a tax rate is applied. Percentage exemptions provide the same percentage tax cut to homeowners at all income levels.
Montana is a percentage-based state. The legislature has changed the homestead exemption, to increase the percentage of market value that is exempt from property taxes. Over the past six years, the homestead exemption rate has increased from 34% in 2008 to 47% in 2014. This has the effect of mitigating higher property taxes due to increased property values (by exempting a greater amount of property subject to the tax). Below is an example of how it works
Market Value in 2014 $100,000Homestead Exemption % 47%Homestead Exemption Amount $47,000Taxable Market Value $53,000
In general, property tax tends to be a regressive tax, meaning that lower-income and middle-income households on average pay a greater share of their income. This is because housing costs tend to be larger in proportion to the income of low-income households than higher-income households. While some homestead exemptions in other states (which exempt a flat dollar amount) result in a less regressive system, Montana’s homestead exemption fails to target those most in need of property tax mitigation, namely those homeowners for whom increased property taxes would be unduly high in relation to their income.
Up next we will discuss tax rate to get us closer to understanding exactly how our property taxes are calculated. Property taxes in Montana are very complicated, but together we will understand it better. If you have questions, post them to our Facebook page.
MBPC is a nonprofit organization focused on providing credible and timely research and analysis on budget, tax, and economic issues that impact low- and moderate-income Montana families.