Law Review: Homesteading your house
Every once in a while some of you receive solicitations from companies offering to record a homestead to protect your home. The flyers make it sound like you will lose your home if you do not “record a homestead.” Most of the time you need a homestead like you need tin siding on your home.
This Law Review may help answer your questions.
Under California law, homeowners can homestead their residences by recording a simple two page document called Declaration of Homestead. A tenant with an unexpired lease term of no less than two years can do the same. A homestead is a dollar amount of equity in a homeowner’s dwelling which can be protected from creditors. A homestead declaration has priority over most judgment liens and some government liens.
Homesteads are often recorded when a person or a family is in financial trouble. Debts are piling up, mortgages are growing and for one reason or another, a giant judgment looms in the future. For that reason, there is a bit of a stigma associated with recording a Declaration of Homestead as it suggests someone is trying to protect their assets from creditors. But frankly how can there be a stigma when essentially no one sees the recorded declaration? It’s merely a matter of record, and Recorders won’t tell.
The homestead declaration protects the owner’s equity in the property — the difference between the value of the property and what is owed — from most creditors.
The Homestead Exemption is $75,000 for a single person, $100,000 for a married couple or head of household, and $175,000 for anyone disabled and for property owners age 65 and older.
The concept of a homestead is that a man’s home is his castle, or as the case may be, a women’s home is her castle. With certain exceptions, no one should be able to take away your castle — as long as it is not too valuable.
If you have severe financial problems or anticipate that a large judgment may be obtained against you, record a homestead declaration. There is no downside. You can record a declaration right up to when a creditor is about to take your house through a sheriff’s sale, but there are advantages to recording earlier.
The homestead exemption protects your primary residence from most creditors. But there are exceptions: mechanic’s liens, deeds of trust when you borrow money against your house, HOA assessments, child and spousal support payments and tax liens. Those obligations are self-imposed so may not be protected with the filing of a homestead exemption on your property.
Here’s how the exemption works. If your property is worth $200,000 and the loans against the property amount to $120,000, you have equity of $80,000. The homestead exemption of $100,000 will protect a married couple from a creditor’s forced sheriff’s sale because there is less than $100,000 of equity i.e., you keep your home and your creditors cannot force a sale. That explains why some debtors record a bogus deed of trust against their home to reduce their equity.
However with the same facts, a single owner with a $75,000 homestead exemption may be forced into a sheriff’s sale because there is more than $75,000 of equity. In that case the home may be sold at the sheriff’s sale by the creditor and the owner keeps the first $75,000 generated from the sale. The creditor gets the balance.
When you sell your homesteaded home, you may transfer the homestead exemption to the proceeds of the sale and protect your money for six months. If the proceeds are used to purchase another home, the exemption may be transferred within the six month period.
While there is a way to homestead your residence without filing a declaration, it is advisable to file a declaration if you anticipate problems with creditors.
Jim Porter is an attorney with Porter Simon licensed in California and Nevada, with offices in Truckee and Tahoe City, California, and Reno, Nevada. Jim’s practice areas include: real estate, development, construction, business, HOA’s, contracts, personal injury, accidents, mediation and other transactional matters. He may be reached at email@example.com or http://www.portersimon.com.