The United States has a provision known as the homestead exemption; it allows homeowners to mark some or all of their primary residence as “exempt.” When used effectively, this provision can stop creditors from claiming a property even after winning a judgment against the homeowner.
As with most aspects of the US legal system, homestead exemptions differ from state to state. That’s why we’ve compiled this primer detailing exactly how homestead protection in California works.
- Can You Lose Your Home in a Lawsuit in California?
- California Homestead Exemption
- The Limited Benefits of Homestead Exemptions in California
Can You Lose Your Home in a Lawsuit in California?
Before we dive into homestead exemptions, we’ll answer the question on everyone’s mind: Can you lose your home in a lawsuit in California? Unfortunately, the answer is yes. The state allows creditors to sue homeowners for virtually everything they own. If you are sued and don’t have an asset protection plan in place, you could very well lose your house.
Fortunately, homestead exemptions are intended to prevent this outcome. We’ll explain how they do (and don’t) provide the protection necessary to safeguard your home during a lawsuit.
California Homestead Exemption
California is a partial homestead state. Homeowners can exempt a portion of their primary residence’s equity from lawsuits —but not all of it. As of January 1, 2021, California Civil Procedure Code §704.730 sets the homestead exemption at a minimum of $300,000 and a maximum of $600,000. The exact exemption amount is based on the median sale price of a single-family home in the county during the prior calendar year. If the median home price is below $300,000, the exemption defaults to the $300,000 minimum. If it exceeds $600,000, the exemption is capped at the $600,000 maximum.
So, if you live in the Golden State, homestead exemptions can only protect between $300,000 and $600,000 worth of equity, adjusted for inflation. But here’s the catch: Most homes in California fall outside that range’s upper limit.
Consider this: per Bankrate, the median home price in California is $866,100. If every single home in California were to cost exactly that much, then the max homestead exemption of $600,000 would leave $266,100 of value completely uncovered.
The worst-case scenario, however, is what those living in urban counties have to endure. For example, as of this writing, the median home price in San Francisco County is around $1.4 million. Because the cap on exemptible equity is $600,000, that leaves a full $800,000 unprotected. As you can see, California’s homestead exemption is less effective in counties with high home values.
If your home’s equity falls within the state limits, your property may be safe for the time being. However, in most cases, further action is needed to protect your home from a lawsuit. Why? Because being covered now doesn’t mean you’re protected indefinitely.
Judgments in California last for 20 years. Therefore, creditors will often wait until the value of your home outstrips the coverage provided by the homestead exemption. Once that happens, your judgment creditor can swoop in to seize your house. So, unless you’ve taken additional steps, you may be sitting on a ticking legal time bomb.
The Limited Benefits of Homestead Exemptions in California
The biggest weakness of a homestead exemption in California is the gap between the maximum exemption and the average cost of a home. And that’s not the only weakness; here are some other flaws to know about:
Limitations for bankruptcy: The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) imposes additional restrictions on homestead exemptions in bankruptcy cases. If a homeowner acquires their property within 1,215 days (approximately 3.3 years) before filing for bankruptcy, the homestead exemption may be limited to $170,350, regardless of state laws. This provision can adversely affect homeowners who have recently purchased their homes. Exceptions apply if the home was bought with proceeds from another protected California home or received through inheritance or divorce.
Vulnerability to federal creditors: The homestead exemption applies only to civil creditors and certain state creditors. Federal and state agencies, such as the IRS, are not bound by homestead laws and can enforce liens or force the sale of a property to satisfy tax debts.
Short reinvestment period: Under the declared homestead exemption, homeowners must reinvest the exempted equity into another primary residence within six months. Given the competitive nature of California’s housing market, finding and purchasing a new home within this timeframe isn’t always possible. If you fail to purchase a new property using those exempted funds, you could lose them.
Exclusion of certain debts: The homestead exemption does not protect homeowners from all debts. Obligations such as child support, spousal support, and tax liens take precedence over the homestead exemption. Therefore, even if a homeowner has a declared homestead, these specific debts can still lead to the forced sale of the property.
Don’t Let Subpar Homestead Exemptions be Your Home’s Only Defense – Call Asset Protection Planners
If you own a home in the Golden State, you can’t count on California’s homestead exemptions to keep you safe during a lawsuit. Luckily, a homestead exemption isn’t your only line of defense. At Asset Protection Planners, we’ve spent decades establishing ironclad safeguards for California homeowners. Whether you need the unbreakable protection offered by an offshore trust and LLC or the privacy afforded by a land trust, you can count on us to set it up correctly.
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