A homestead is the family residence, which in most states is exempt to a certain extent from forced sale for collection of debt. In California, there are at least three kinds of homestead exemption:
(1) Declared homestead
(2) Automatic homestead exemption and
(3) Property tax homestead exemption
The first way in which California law protects homeowners is the recorded, declared homestead. A homestead declaration is a written statement, made under penalty of perjury that claims a particular “dwelling” (for example, a house, or even a boat) as the owner’s principal place of residence, in other words, the owner’s home. The declared homestead exemption can apply to both voluntary and involuntary sales.
When a homestead declaration is (1) signed by a homeowner, (2) notarized, and (3) recorded, it helps to protect the home against loss to creditors. “Recorded” means that the original signed homestead declaration is filed in the recorder’s office for the county in which the home is located. A properly recorded homestead declaration protects the home (and the land) from many legal enforcement measures. For example, if a homeowner files for bankruptcy, the homestead declaration should allow the owner to retain the home or some of the equity in the property.
Automatic Homestead Exemption
The second type of homestead is the automatic exemption. The homeowner doesn’t have to do anything to obtain this exemption. He or she has this protection by right. This automatic exemption is substantially similar to the declaration of homestead. The amounts of the exemption are the same under either and are:
- Single person $75,000
- Married couple $100,000
- Single person with dependents $100,000
- Over 65 (married or not) $175,000
If the homeowner has enough equity to satisfy encumbrances, he keeps the statutorily exempt amount. Creditors reap any surplus up to the amount of their judgment lien. To qualify, the owner must have continuously resided in the home from the time that the creditor’s judgment lien attached until a court determination that the exemption applies.
The exemption is not cumulative with a declared homestead. In other words, even if the homeowner recorded a homestead declaration, she only gets the $75,000 exemption if single (or $100,000 if married, $175,000 if over 65).
Because of the existence of the automatic exemption, declared homesteads these days are rare. Still, a client may have need for the declared homestead where he or she owns more than one house, both of which might be viewed as the principal place of residence, for instance, property in Venice and Palm Springs.
Neither form of homestead applies to secured creditors. Thus, lenders whose claims are secured by a prior mortgage or deed of trust on the property or holders of a mechanic’s lien on the property may proceed to collection without interference from the homestead claim. Rather, the homestead serves as a shield to unsecured third party creditors.
Property Tax Homestead Exemption
The third kind of homestead is a homeowner’s exemption of $7,000 from the assessed value of the home. The homeowner obtains this relief by completing a form BOE-266. One should complete and return this form to the County Assessor. On average, it’ll save the homeowner about $90 a year in property taxes – better than a stick in the eye, as they say.
Summary: Since the automatic homestead exemption provides virtually the same protections as the declaration of homestead, the latter is infrequently seen. Moreover, given the high value ofCalifornia real estate and the modest homestead protection amounts, clients who are concerned about asset protection are advised to consider other creditor protection techniques such as trusts and limited liability companies.
Edgar Saenz is a Los Angeles estate planning, probate, and asset protection attorney and graduate of Stanford Law School. He is a member of numerous bar associations and Trust and Estates sections. Telephone: (310) 417-9900; email: [email protected].