Homestead/Farmstead Exclusion (Act 50)
How do homestead and farmstead exclusions work?
How do homestead and farmstead exclusions reduce real property taxes?
The Homestead/Farmstead Exclusion Act (Act 50) is the exclusion of $18,000 in assessed value to real property. The amount of real property tax owed by any taxpayer is the tax rate (measured in mills) multiplied by the assessed value of said property. Allegheny County's tax rate is 4.73. This means that for every $1,000 in assessed value, a taxpayer will pay $4.73 in taxes.
Mileage is the tax rate expressed in mills (thousandths of a dollar) per dollar. 1 mill = 0.001, 4.73 = 0.00473
A property is assessed at $100,000. The property tax would be $473.00 year:
|Assessed Value multiplied by the Tax Rate = Tax Owed
|$100,000 x 0.00473 = $473.00
The same property receives a $18,000 Homestead Exclusion. This same property now has an assessment of $82,000 and the tax owed is $387.86 - a savings of $85.14:
|Assessed Value minus the Homestead Exclusion multiplied by the Tax Rate = Tax Owed
|$100,000 - $18,000 = $82,000 x 0.00473 = $387.86
EVERY PROPERTY OWNER IN ALLEGHENY COUNTY WHO QUALIFIES FOR THE HOMESTEAD/FARMSTEAD EXCLUSION ACT (ACT 50) SAVES $85.14 ON THEIR COUNTY TAXES A YEAR.
The homestead exclusion will be based on and will change assessed values, not market values. Market values are the price at which a property would sell with both a willing buyer and seller. Assessed values are the values used in calculating real property taxes, and always are calculated as a percentage of market value. The percentage used on all properties in a county to calculate assessed values is set by the Office of Property Assessments during reassessment, and is called the assessment ratio. Unless the property itself is changed in some way that affects its market value, through either physical improvements or demolition, this assessed value will not be changed or recalculated until the next reassessment occurs.
How can homestead and farmstead exclusions be implemented in my community?
In general, the homestead and farmstead exclusions are implemented in a taxing jurisdiction by action of the local elected officials. Initially, they must decide to implement the exclusions and (most importantly) decide how to pay for them. The Homestead Property Exclusion Program Act specifically prohibits raising real property tax rates to pay for the homestead or farmstead exclusions, so another source of revenue must be found. For most jurisdictions, this will be possible only through tax reform, because they will need substantial new revenues to pay for the exclusions. Some jurisdictions with a major budget surplus may be able to implement the exclusions as well.
School districts also can implement the homestead and farmstead exclusions by adopting the new local tax structure under Act 50 of 1998, which shifts the local tax burden from the real property tax to the earned income tax. Real property tax reductions resulting from school tax reform in Act 50 of 1998 must be accomplished through the homestead and farmstead exclusions. Depending upon how much additional revenue a school district receives from changing its earned income tax, the school district also may have to reduce real property tax millage rates if its new homestead and farmstead exemptions would exceed the constitutional limit of 50 percent of the median assessed value of homestead properties in its jurisdiction. This new tax structure (and thus the exclusions) are implemented locally through a voter referendum initiated by the school board or local voters.
Property owners enroll their properties for the homestead and farmstead exclusions through an application to the Office of Property Assessments. This office will then use those applications to calculate the median value in each taxing jurisdiction and the total value of properties receiving the exclusions. County tax assessment offices are required to update and provide this information annually to local officials for their use in setting the size of the exclusions.
When local officials get the information from their county tax assessment office, they then must set the size of the homestead and farmstead exclusions they will provide in their jurisdiction. The maximum size of the homestead exclusion is half of the median assessed value of homestead property in the jurisdiction, as determined by the county assessor. The size of the farmstead exclusion cannot be larger than that of the homestead exclusion. Local officials will have to ensure that the exclusions are not set too high or they won't be able to afford to pay for them.
If the jurdisdiction crosses county lines (as school districts sometimes do), the exclusions in both parts of the jurisdiction across the county line must be the same after adjusting for the common level ratios. The homestead and farmstead exclusions also must be adjusted after reassessment.
Will the homestead and/or farmstead exclusion be the same on my school, county, and municipal taxes?
No. Each homestead property will be subject to three different homestead exclusions: 1) the homestead exclusion for your school district taxes, which will be set by the school district and based on the median value of homesteads in your school district; 2) the exclusion of your county taxes, which will be set by the county and based on the median value of homesteads in your county; and 3) the exclusion for your city, borough, or township taxes, which will be set by your municipality and based on the value of homesteads in your municipality. These values likely will be different because assessed values vary across and within jurisdictions. Farmstead properties similarly will be subject to three different farmstead exclusions.