Texas Homestead Tax Exemption Vs. Homestead Liability Protections

By: Jim Dossey, MS, MBA, JD

Many Texas property owners know that they should apply for the Texas homestead tax exemption to reduce their property taxes. Many people, however, mistakenly believe that applying for the homestead exemption also provides liability protection from creditors. From an asset protection standpoint, it is important to understand that the homestead tax exemption is different from homestead liability protections automatically provided under the Texas property code.

Homestead Tax Exemption

Property owners must apply for the homestead tax exemption. The requirements for the homestead tax exemption vary by the type of exemption applied for (i.e. general, age based, disabled vet, cemeteries, farms, charities, etc.). However, for a general homestead exemption, the owner must have an interest in the property and use it as their primary residence. The applicant must state in the application that they have not claimed the exemption on any other property in or outside of Texas. Generally, the address of the property must match the address on your driver's license (although the chief appraiser can waive this requirement in some cases such as proof of military service). You can only claim the homestead tax exemption on one property.

Homestead Liability Protection

Texas is known as a debtor friendly state, primarily because of its very strong homestead liability protection laws. Unlike the homestead tax exemption, Texas homestead liability protections arise automatically; no filing is required. As long as the homestead is occupied, liability protection cannot be lost.

Under the Texas Property Code, the homestead of a family or single adult is protected from forced sale for purposes of paying debts and judgments except in cases of purchase money, taxes (both ad valorem and federal tax liens against both spouses), owelty of partition (divorce), home improvement loans, home equity loans, reverse mortgages, liens predating the establishment of homestead, refinance loans, or the conversion or refinance of a lien on a mobile home that is attached to the homestead. All other judgments and liens against the homestead are void.

Homestead liability protection is only available to individuals (not partnerships, corporations, or LLC's). Additionally, they do not apply to investable or business assets. For this reason, we often recommend that those assets be placed in an asset protected entity such as a LLC (or even better, a Series LLC). For property to qualify as a homestead, the property owner must either live on it or have a reasonable expectation of building a home on it. A family can only have one homestead.

Property Code section 41.002 defines the size limitations for Texas homesteads, depending on whether the property is "urban" or "rural."

Under Texas homestead liability protections, personal property (up to $60,000 for families and $30,000 for individuals) is also protected as long as it falls under a certain list. You can read more about exemptions here.

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