Homesteading your property

By Douglas A. Crowder, Esq.

Copyright © 2002. All Rights Reserved

The word "homestead" comes from the Old English word "home" (a dwelling or residence) and "stead" (place). A homestead means the home and adjoining land occupied by a family or the ancestral home or place of origin of a family. [Webster Dictionary, 1913] In the United States, it formerly meant a house and land, especially land obtained for little or no money from the government which is lived on and used for farming. [Cambridge International Dictionary] Now it most commonly means a dwelling and land occupied by the owner as a home and exempted by law from seizure or sale for debt. [Random House American Collegiate Dictionary]

Homestead Exemption Laws have been enacted in the U.S. since the mid 1800s and are designed primarily either to aid the head of a family to acquire title to a place of residence or to protect the owner against loss of that title through seizure for debt. According to the 1911 version of the Encyclopedia Brittanica, they "owe their origin to the demand for a population of the right sort in a new country, to the conviction that the freeholder [landowner] rather than the tenant is the natural supporter of popular government, to the effort to prevent insolvent debtors from becoming useless members of society, and to the belief that such laws encourage the stability of the family." [See, entry for homestead]

The amount of the homestead exemption varies from state to state. On the low end of the scale, the exemption is limited to $5,000 in West Virginia, South Carolina, Ohio, Kentucky and Georgia. At the high end of the scale is Texas, where 200 acres of rural land or 10 acres of urban land, plus all improvements thereon, (to an unlimited dollar amount) are exempt. Florida, Oklahoma and Kansas also have unlimited dollar exemptions for a specified number of rural or urban acres. [Citations to these state laws are omitted here for brevity, but are available on request]

In California, the homestead exemption is $75,000 for a “family unit” "such as a husband and wife, or one person who cares for a minor child, grandchild, parent, or disabled relative. It is $125,000 for a person who is over 65, or is disabled, or who is over 55 with an income below $15,000 (or $20,000 for a married couple). For anyone else, the exemption is $50,000. [California Code of Civil Procedure ("CCP") Section 704.730]

If a creditor obtains a judgment against the owner of a homestead, the creditor can obtain a court order to force a sale of the real property used as a homestead, but only if the property can be sold for enough to satisfy all liens and encumbrances on the property plus the amount of the homestead exemption. [CCP Sec. 704.800(a)] For example, if the debtor’s residence has a fair market value of $200,000, and has a mortgage of $100,000, and the debtor is entitled to a homestead exemption of $50,000, if the judgment creditor forces a sale of the house, the proceeds of the sale would be first applied to pay off the $100,000 mortgage, then to pay the debtor his $50,000 exemption, then the remainder would be applied to the judgment.

The above described benefit of the homestead exemption is automatic, and does not require that the homeowner record a "declaration of homestead" or "homestead declaration." It is highly recommended, however, that every homeowner in the state of California prepare and record such a declaration. Two reasons will be discussed.

For example, if a creditor obtains a $100,000 judgment against the debtor and records an "abstract of judgment," that creates a judgment lien on any real property the debtor owns in the county in which the abstract is recorded. This lien would immediately attach and reach any equity in the dwelling above the amount of any liens and encumbrances recorded before the abstract. If the debtor’s residence has a value of $200,000, and mortgage of $125,000, the creditor then has a lien against the remaining equity of $75,000. Then, the debtor could not voluntarily sell his residence without all of his equity going to the judgment creditor.

On the other hand, if the debtor had recorded a homestead declaration before the creditor obtained the judgment, then the debtor would be able to sell his house and keep the amount of homestead exemption to which he was entitled.

Second, without a recorded homestead declaration, the debtor does not get the benefit of the exemption in a non-judicial foreclosure proceeding (such as a trustee’s sale triggered by the debtor’s failure to make mortgage payments). If the debtor’s house sold at a trustee’s sale, any proceeds exceeding the costs of sale and the amount secured by the foreclosed trust deed would be payable to the judgment creditor up to the amount of his judgment. On the other hand, if the debtor had filed a homestead declaration before the judgment lien attached, the judgment debtor would be entitled to the excess proceeds (up to the homestead exemption amount).

Recording a homestead declaration is fairly simple. The declaration is a document that includes the names of the property owners, the description of the property, and a statement that the property is the principal dwelling of the owner and that the owner or spouse resides in the property. The declaration must be signed before a notary public. [CCP Sec. 704.910, .930]

The declaration must then be recorded with the county recorder of the county where the property is located. The declaration is not valid effective until it is recorded. [CCP Sec. 704.920]

In essence, recording a homestead declaration gives the debtor a lien up to the amount of exemption to which he is entitled, which will be senior to any judgment liens that are recorded later. To many property owners, it may seem unlikely to that this would ever be necessary or of benefit. However, since it is simple and fairly inexpensive to record a homestead declaration, it is recommended that all property owners do so, just for added protection in the unlikely event that it will be needed.