Administrative Services

Homestead/Farmstead Exclusion (Act 50)

What are the effects of homestead and farmstead exclusions?

Do the homestead and farmstead exclusion provide real tax savings?
Yes and no. The homestead and farmstead exclusions forbid school districts, counties, and municipalities from raising real property rates to make up for tax revenue lost due to the homestead or farmstead exclusion. On the other hand, it is important to remember that these tax reductions are not free; they must be paid for with increases in other local taxes. If school districts implement the exclusions under Act 50 of 1998, the exclusions will be paid for through the earned income tax. Counties and Municipalities must find another way to pay for the exclusions because these jurisdictions are not included in Act 50. Someone must pay more so others can pay less.

Not all taxpayers will end up saving more in local taxes once the exclusions have been paid for. An individual home owner may receive a smaller real property tax bill due to the homestead exclusion, but also may end up paying more in other taxes as a result. Some people with relatively high job incomes may end up paying more in the earned income tax than they save, while homeowners with low incomes or not much earned income (such as retirees) may pay less overall.

Is this the end of the real property tax?
No. Because the homestead exclusion exempts only a maximum of one-half of the median assessed value of properties, most properties still will owe some real property tax. It may mean the end of real property taxes for owners of properties worth less than half of the median value of homesteads, and it will provide reductions in real property taxes to other owners of eligible property.

In addition, the homestead and farmstead exclusions by themselves only forbid raising real property tax rates to make up for tax revenue lost due to the homestead exclusion. Jurisdictions still will be able to raise real property tax rates in the future as they need more tax revenue. If school districts implement the exclusions as part of tax reform under Act 50, however, they will be able to make only limited increases in the future without getting voter approval, as one condition to their accepting the new tax system.

Will my taxes go down or up if the homestead exclusion is implemented?
If your own property is eligible to receive the homestead and/or the farmstead exclusion, the amount of real property tax reduction your property receives depends upon: 1) whether the exclusion is set at the maximum amount or at some smaller level; 2) the overall value of homestead property in your community; and 3) how the value of your own property compares to the median value of homesteads in your community.

The homestead exclusion can be a maximum of one-half of the median value of homestead properties in the jurisdiction. Some jurisdiction may choose or be able to afford only a smaller exclusion (such as one-quarter of the median value). A larger exclusion should provide you with a larger real property tax reduction. The farmstead exclusion cannot be larger than the homestead exclusion.

The overall value of homestead property in the community affects the size of the homestead exclusion; if properties in general are worth a lot, the dollar value of the homestead exclusion will be high because the median value of homestead properties likely will be high. If the median value of homestead properties is $50,000, the maximum exclusion for all eligible properties will be $25,000 (half of the median value of $50,000); in contrast, if the median value is $70,000, the homestead exclusion in the jurisdiction will be a maximum of $35,000 (half of the median value of $70,000). A larger median value in the jurisdiction means that larger homestead and farmstead exclusions are possible in that jurisdiction.

The percentage reduction in your real property tax bill will be influenced by how the value of your own property compares to the median value of homesteads (see Table 1). If your property is worth less than the median value of homestead properties in your community (and your jurisdiction uses the maximum homestead exclusion of one-half the median value) you may experience a more than 50 percent reduction in property taxes. Conversely, if your property is worth more than the median homestead, you may experience a decrease of less than 50 percent in your real property taxes.

In the example shown in Table 1, notice that all properties receive a $30,000 reduction in value due to the homestead exclusion. The properties with the lowest values receive the largest percentage reductions in their taxes, while the more highly valued properties receive smaller percentage reductions. Everyone's taxes are reduced by $600, but this has a bigger relative impact on properties with smaller values than on those with larger values. An owner of a property with an initial value of $40,000 in this sample community would enjoy a 75 percent reduction in property taxes, while this same $600 would represent only a 30 percent reduction in real property taxes to the owner of a property valued at $100,000.

Table 1. Effect of homestead exclusion on properties in a sample jurisdiction

  • Median value of homesteads: $60,000
  • Homestead exclusion: half of median value, or $30,000
  • Tax rate: 20 mills

Without
the Homestead Exclusion
With the
Homestead Exclusion of $30,000
Percent Decrease in
Real Property Taxes
Property Value Tax Owed Property Value Tax Owed
$30,000 $600 $0 $0 100%
$40,000 $800 $10,000 $200 75%
$50,000 $1,000 $20,000 $400 60%
$60,000 $1,200 $30,000 $600 50%
$70,000 $1,400 $40,000 $800 43%
$80,000 $1,600 $50,000 $1,000 38%
$90,000 $1,800 $60,000 $1,200 33%
$100,000 $2,000 $70,000 $1,400 30%

In general, who benefits and who loses from the homestead exclusion?
How the homestead exclusions are paid for in a jurisdiction will have a big effect on who benefits and who loses from it. Jurisdictions considering implementing the homestead exclusions should make a thorough and objective analysis of the potential effects on their own community. In general, however, the homestead exclusion should benefit permanent residents who own their own homes in the taxing jurisdiction. All eligible property owners in the jurisdiction will receive the same dollar savings, but as Table 1 illustrates, this will make a bigger difference for owners of properties with lower values than for those who own properties with higher values.

Depending upon how the exclusions are paid for, renters generally will lose under a homestead and farmstead exclusion. Rental properties are not considered homestead properties, so they will be ineligible for the exclusion. Renters, however, at least indirectly pay the real property tax; rent usually is set by landlords to cover all expenses, including the real property taxes on the property. If taxes are high, rent will be higher than if taxes are low. Renters will be hurt by the exclusion because they likely will be paying more in local income taxes (to pay for the exclusion) but will not receive any reduction in the amount they indirectly pay in real property tax.

Local businesses will not benefit from the homestead exclusion, which is designed to ensure that property tax reductions go to home and farm owners. On the other hand, they will not pay more in real property or other local taxes because of the homestead exclusion if it is implemented under tax reform. If the exclusions are implemented by using budget surpluses and are followed by real property tax increases in the future, they may end up paying more real property tax in the future because of the exclusion.

In general, who benefits and who loses from the farmstead exclusion?
How the farmstead exclusion is paid for in any one jurisdiction similarly will have a big effect on who benefits and who loses from it. Jurisdictions considering implementing the farmstead exclusion should make a thorough and objective analysis of its potential effects on their own community. In general, however, the farmstead exclusion should benefit family farmers who live on their farm. All eligible farm owners in the jurisdiction will receive the same dollar savings, but as Table 1 indicates, this will make a bigger difference for owners of properties with lower values than for those who own properties with higher values.

If the farmstead exclusion is paid for through local income taxes, local residents who pay that tax will bear the costs of the exclusion. Resident farmers will be paying higher income taxes to pay for the exclusions, just like other residents, but they also will be receiving the homestead exclusion on their home in addition to the farmstead exclusion. The farmstead exclusion is received in addition to the homestead exclusion on any eligible farm.