There are two important homestead concepts in Florida law. Florida’s Constitution protects homestead property from creditors. A separate provision of Florida law provides an partial exemption from property taxes for homestead properties. This article deals with homestead protection, Click on our article on the HOMESTEAD TAX EXEMPTION for information on that topic.
Article X, Section 4 of the Florida Constitution protects the homestead of a Florida resident from many kinds of creditors. Specifically, Florida’s homestead exemption prevents ordinary judgment creditors from foreclosing against a homestead property. This protection applies to many types of judgment debts, including credit card debt, medical bills, and personal loans.
How to Qualify For Florida Homestead Protection:
1. Own The Homestead Property:
A person must hold legal title to the property for it to qualify for the Florida homestead protection. Title can be held in your own name or by you as trustee of your living trust.
A property that is owned by any other entity, such as a corporation, limited liability partnership, or LLC will not qualify for the Florida homestead protection. This is true even if you are the sole owner of the entity.
2. Intend To Make The Property Their Permanent Residence:
A person must intend that the property be their permanent and primary residence. A person may form this intent immediately upon becoming owner of and taking up residence at the property.
A person may only have one homestead property. So a person who owns multiple properties may declare a specific property as their homestead only if they maintain that property as their primary residence.
3. Live In The Property:
A person must live in the property in order for it to be their homestead property. This means the person must physically reside in the property with their belongings. There is no set amount of time a person must live in a Florida property each year to maintain homestead creditor protection. Note that there is a separate homestead tax exemption that requires a person reside in the homestead property on January 1st of a given year and apply for the tax exemption with the local tax authority.
The definition of homestead in Florida is broad and includes condominiums, manufactured homes, and mobile homes. Florida’s homestead law protects unlimited amounts of value in the homestead property. The lot must be 1/2 acre or less if it’s located in the city. It must be 160 acres or less if it’s located in an unincorporated county. There is no limit on the kind or size of improvements that can be placed on homestead property.
Florida's Homestead Provisions Do Not Protect Against Certain Debts
While Florida’s homestead protection offers robust protection against many creditors, it does not shield the property from all types of debts. Specifically, the exemption does not protect against:
Property Taxes: The homestead protection does not prevent foreclosure by the government for unpaid property taxes.
Mortgages: If the homestead property is collateral for a mortgage or home equity loan, the lender can foreclose on the property if the loan is not paid.
Mechanic’s Liens: Contractors or builders who have performed work on the homestead and have not been paid can place a mechanic’s lien on the property and potentially force its sale.
Homeowners’ Association (HOA) Fees: Unpaid HOA fees can also lead to foreclosure despite the homestead protection.
Joint Ownership Can Change or Destroy Florida Homestead Protection
Joint ownership of a homestead in Florida can compromise the protection provided by the Florida’s constitutional homestead provisions, particularly when one of the co-owners does not use the property as their primary residence. If a co-owner who does not reside on the property incurs a judgment debt, that debt can result in a lien being placed on their share of the property. The creditor may then seek to satisfy the debt by forcing a sale of the entire property.
Consider a scenario where a married couple own a homestead property. They decide to add a close friend as a third owner, intending to simplify inheritance when they pass away. If the friend lives in another state and does not claim the homestead as their primary residence, they are not eligible for homestead protection on their portion of the property. If a creditor obtains a judgment against the third owner, a lien can be placed on their share. The creditor could potentially force a sale of the home to satisfy the debt, with the proceeds divided between the creditor and the remaining owners. This situation could result in the the original owners losing their home, even though they are otherwise entitled to homestead protection.
Florida Homestead Protection Applies to the Property’s Sale Proceeds
Yes, the Florida homestead protection can extend to the proceeds from the sale of a homestead property, provided certain conditions are met. Specifically, the proceeds must be intended to be reinvested in another homestead property within a reasonable time. If this condition is met, the proceeds are protected from creditors.
Example: If a Florida resident sells their homestead property and receives $300,000 in proceeds, those proceeds can remain exempt from creditor claims if the seller intends to use them to purchase a new homestead, and does so within a few months. If the proceeds are not reinvested in a new homestead, they may lose this protection.
Florida Homestead Protection Supersedes Fraudulent Conveyance Law
Florida’s constitutional homestead language even protects assets used to purchase a homestead from existing judgments against the debtor, according to the Florida Supreme Court. So, a Florida resident can evade a judgement creditor by investing unlimited amounts of money a large home and then making the house his permanent residence. Provided that the resident meets the homestead protection requirements, that creditor will be unable to collect against the invested assets by forcing a sale of the homestead property.
Contrast this scenario with how Florida courts would treat a judgment debtor who attempted to transfer assets into a trust or an investment property to evade his creditor. Florida’s fraudulent conveyance statute (Florida Statutes § 726.105(1)(a)) would allow the court deem the transfer fraudulent f it is made with "actual intent to hinder, delay, or defraud" any creditor of the debtor. If a court determined that the transfer of assets was a fraudulent conveyance, the transfer could be voided, and the assets could be recovered by the creditor.
In its holding in Havoco of America v. Hill, 790 Fla. 1018 (Fla. 2001), the Florida Supreme Court distinguished the Florida Constitution’s homestead protection from the statutory prohibition on fraudulent conveyances. It opined that Florida’s constitutional homestead provisions take precedence over fraudulent transfer remedies enacted by the Florida legislature. It further held that the intent behind acquiring or protecting the homestead property does not impact the constitutional protection against forced sale. Thus, a debtor can shield their homestead property from creditors, despite allegations of fraudulent intent in acquiring or protecting the property.
It is important to note that Florida courts recognize as exception to the fraudulent conversion protection set forth in Havoco. If a debtor obtained money by deceit or fraud, and then used the money to purchase or improve the debtor’s homestead, homestead protection would not be available. In that situation, a creditor, upon proving the illicit nature of the funds used to buy or improve the debtor’s property, could obtain and foreclose an equitable lien on the property.
How is Florida's Homestead Protection Treated in Bankruptcy Proceedings
In bankruptcy proceedings, Florida’s homestead protection can provide significant protection for a debtor's primary residence.
Chapter 7 Bankruptcy:
Under Chapter 7, debtors may be required to liquidate assets to pay off creditors. However, Florida’s homestead protection can protect the entire value of the debtor's primary residence from liquidation, provided the debtor has owned the property for at least 1,215 days (approximately 3.3 years) before filing for bankruptcy. If you have owned the property for less time, the exemption may be capped at a certain amount based on federal law.
Chapter 13 Bankruptcy:
In Chapter 13 bankruptcy, the debtor enters into a repayment plan rather than liquidating assets. The homestead protection allows the debtor to retain their home while paying off creditors through the repayment plan. The exemption helps in determining the amount of disposable income that can be allocated to unsecured creditors, as the value of the homestead is not included in the debtor’s assets.
How To Use Florida's Homestead Protection to Maximize Asset Protection
To maximize asset protection under Florida’s homestead protection, consider the following strategies:
Maintain Permanent Residency: Ensure that the homestead is your permanent and primary residence to maintain the exemption's protection. Keep records that demonstrate your intent to permanently reside in the property, such as voter registration and utility bills.
Consider Homestead Portability: If downsizing or selling the homestead, reinvest the proceeds into another homestead property within a reasonable time to maintain the protection on those funds.
Use the Exemption Strategically in Estate Planning: Florida’s homestead protection can also play a critical role in estate planning, ensuring that the property passes to heirs without being subject to creditor claims. This can be accomplished by appropriately titling the property, such as through a trust or life estate deed.
By understanding and properly utilizing Florida’s homestead protection, residents can effectively shield their primary residence from a wide range of creditor claims, thereby preserving their wealth and ensuring their financial security. For general information on protecting your wealth, check out our asset protection article.