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Homestead Tax Credit

The Maryland Homestead Tax Credit is so misunderstood, we thought we would devote a whole page to explain how it actually works. Many people believe that their property tax bill will be reduced because the property owner lives in the property as their principal residence. This is not true. The Homestead Tax Credit is a limitation on increasing the property tax bill to no more than a certain percentage higher than the prior year property tax bill. Therefore, we think a better name for the Homestead Tax Credit would have been the Homestead Tax CAP.

Note that this program is separate and distinct from the Homeowners Tax Credit program.

How does the Homestead Tax Credit work?

The Cap is applied separately to the state portion and separately to the county/city portion of the tax bill. The state limitation is 10% on only the state portion of the tax bill. The county/city limitation Cap percentage varies by local jurisdiction. Maryland lists the local jurisdiction percentages here.

Consider the following example of a computation of a Baltimore County Homestead Tax Credit. Suppose last year the tax assessment was 100,000.00. Based on the Baltimore County tax rate of $1.10, last years property tax would be $1,100.00. Suppose the following year, the county raises the assessment to $180,000.00. Since Baltimore County caps the increase at 4%, the homeowner would only pay $1,144.00 ($1,100.00 x 1.04). The tax bill will actually reflect a property tax of $1,980.00 with a Homestead Tax Credit of $836.00.

Suppose the next year the tax assessment drops from $180,000.00 to $150,000.00. Even though the assessment has dropped, the amount of taxes the homeowner would pay will still go up from the prior year. This is because the Homestead Tax Credit was artificially keeping the amount of taxes the homeowner paid below the full tax payment amount. The tax bill will reflect taxes of $1,650.00. ($150,000.00 x $1.10). After applying the Homestead Tax Credit of $461.00 the amount due from the homeowner will be $1,189.00. $1,189.00 is 4% higher than the prior year bill of $1,144.00.

Therefore, regardless of the tax assessment going up or down, the actual net tax bill may still be increasing by the applicable percentage over last years taxes. In many cases, while the tax assessment may go down, the tax bill to be paid can still increase. (Due to the catching up of prior year accumulated Homestead Tax Credit)

If a property is purchased, will the Homestead Tax Credit transfer to the new owner?

Unfortunately not. The Homestead Tax Credit was put into place to limit dramatic property tax increases from year to year, but only for the particular homeowner. If the property is purchased, since the new owner had never previosly paid any prior year property taxes on this property, there is no prior year to apply the Cap to. The new owner does not get to take over the prior owner's Homestead status.

New owners can and should apply for Homestead status to limit future year to year property tax increases. However the Cap will not apply to the first year of purchase.

Homestead Tax Credit FAQ’s

Q. Who is entitled to the Homestead Tax Credit?
A. Only owner occupied principal residences qualify for the Homestead Tax Credit.

Q. How can I tell if the Homestead Tax Credit will be applied to my tax bill?
A. Check the SDAT website. See the bottom of the page under the heading "Homestead Application Information." The status should say "Approved." 

Q. Suppose the county does not have my Homestead designation correct, what should I do?
A. Download a Homestead tax credit application here and submit the application to the county.

Q. Do I have to apply for the Homestead Tax Credit every year?
A. Normally no. Once it is designated on the tax assessment records, the designation carries over from year to year. However, if you notice that the county has changed your principal designation, (normally noticed upon receipt of a substantially higher tax bill than the previous year's bill), you should check the SDAT website to verify the status has not changed.

Need some help with a real estate transaction?

Our office can assist you. Please call or send us an email with your question and we will be glad to assist.