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Should You Homestead?

Should You Homestead?
Should You Homestead Your Home? Homestead Exemption vs. Declared Homestead

When most people hear the word "homestead, " they think of Doc Holliday and Wyatt Earp out homesteading a cattle ranch on the wild frontier. There certainly was a time when the U.S. Government had more land than it needed. To settle new or outlying areas, the federal government gave substantial tracts of land to persons willing to live on it for extended periods of time. These settlers received title to their land by homesteading it.

The modern use of the word means something different in California. A homestead is an exemption provided by California law to every person who lives in a dwelling. Such a dwelling is usually a conventional single-family home, but it might also be a temporary or mobile home such as a trailer, a mobile home or a boat. No action is required to create a homestead exemption. It automatically exists for every property that qualifies for the exemption.

A homestead exemption has only one use. The exemption applies when a home is sold to pay a debt of the homeowner. If a homeowner is sued and loses, then the other party (the "judgment creditor") is entitled to satisfy the amount of the judgment by selling certain assets belonging to the debtor. One of the assets that may be sold is the debtor’s home. The homestead exemption in California protects the debtor/homeowner’s equity up to the amount of the exemption, even if the home is sold.

Here’s how it works: The judgment creditor has the home sold at auction. After the house is sold, the first person to be paid is any lender who has a mortgage on the home. The second person to be paid is the debtor/homeowner. The debtor/homeowner is paid the amount of the homestead exemption. The third person to be paid is the judgment creditor. If nothing is left over after the lender(s) and debtor/homeowner are paid, then the judgment creditor gets nothing from the sale.

The amount of the homestead exemption depends upon several circumstances. If the homeowner is a single person, the exemption is currently $50,000. If the debtor is married and both spouses live in the home, the amount is $75,000. If the debtor lives with and cares for a minor child or grandchild, the amount is $75,000. If the debtor, or their spouse, is 65 years or older, the exemption is $125,000. The exemption may also be $125,000 if the debtor is physically unable to work, or if the debtor is 55 years or older and makes less that $15,100 per year. Other factors may also qualify a debtor for an exemption of $125,000.

The net result of a homestead exemption is that even if a debtor’s home is sold, after any mortgage lenders are paid, the debtor will receive at least the first $50,000, and in some cases up to the first $125,000, of equity from the sale. Of course, if the debtor has less than $50,000 equity in the property, the debtor will not receive more than the lesser value of his or her equity.

In addition to a homestead exemption, California law allows homeowners to record a declared homestead. A declared homestead differs from a homestead exemption in that a declared homestead protects the homeowner’s equity if the homeowner sells his or her home. A declared homestead is created when a homeowner (not yet, necessarily, a debtor) prepares and signs an appropriate form of declared homestead and records the document in the county recorder’s office. Once this document is recorded, it creates a declared homestead in the property described in the homestead document.

How is a declared homestead different from a homestead exemption?

A homestead exemption is useful only if the debtor’s home is sold at auction by the creditor to pay a judgment. If this happens, the debtor/homeowner retains the amount of protected equity after the sale (the amount of the exemption) and the judgment creditor receives the remainder of the equity. However, if the debtor voluntarily sells the home, the homestead exemption is of no use. In the case of a voluntary sale, with only a homestead exemption on the property, the judgment creditor is paid before the debtor/homeowner receives their protected equity, which can leave the debtor/homeowner without anything.

However, with a declared homestead, the debtor/homeowner can voluntarily sell the home and get paid before the judgment creditor. Additionally, if the debtor/homeowner buys a new home within six months, the debtor/homeowner can record a new declaration of homestead. If the equity from the sale of the first home is used to buy the second home, then the funds remain protected from the creditor.

So what’s the bottom line? Everybody receives a homestead exemption by law, which protects some of their equity in the event their home is sold at auction by a creditor. A declared homestead goes one step further and protects a portion of your equity against creditors no matter who sells your home – you or the creditor. And you can then invest it in a new home without losing that equity to a judgment creditor.

Please note: A homestead exemption is different from a homeowner’s exemption and serves different purposes.

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