A homestead cap is a benefit of a homestead exemption and limits the increase in a property's assessed value. A homestead exemption enables homeowners to pay less in property taxes because it exempts a percentage of the home's value from taxation.
Real estate taxes, also known as property taxes, are paid based on formulas established by the taxing entity. These entities may include a state, city, county, school district or special district. The amount of tax owed is generally a percentage of the appraised (or assessed) value of a property or home, not a home's market value.
The homestead cap is designed to protect a homeowner from a large increase in property taxes, usually a primary residence (as opposed to a second or vacation home). It is particularly important for homeowners during times of rapid appreciation in housing values, when a tax bill could see a substantial increase year-over-year. Homeowners first must qualify for a homestead exemption before becoming eligible for the homestead cap.
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The homestead cap is often an amount equal to a percentage of the most recent assessed valuation of the property, with the percentage determined by the taxing entity. For example, with a 10 percent cap, a property that was assessed at $200,000 in the most recent year could not be valued for taxation purposes at more than $220,000 the following year.