Dear Clients, Colleagues and Friends,
As you may have heard, California’s Governor, Gavin Newsom, recently signed into law Assembly Bill 1885 (“AB 1885”), which substantially increases the amount of equity California homeowners can protect in their primary residence effective as of January 1, 2021.
Under California’s current homestead exemption, the amount of equity in a primary residence that a homeowner can protect from a judgment creditor ranges from $75,000 for a single person up to a maximum amount of $175,000, depending on certain characteristics of the homeowner, such as whether the homeowner is over 65 years of age or disabled. While the amount of California’s current homestead exemption effectively protected much of the equity in most homes back when the law was originally enacted 45 years ago, given today’s inflated home values, the current homestead exemption does not offer any meaningful amount of protection to financially distressed individuals. As such, homeowners often feel compelled to take additional measures to protect any exposed equity in their residences. Examples include gifting the residences to irrevocable trusts; transferring title to an LLC (which could result in the loss of the homestead exemption, loss of the capital gains exclusion following a sale of the property, and possible property tax reassessment); or “equity stripping” their residences and transferring the money to more favorable asset protection jurisdictions either domestically or offshore.
However, starting on January 1, 2021, AB 1885 will bridge the gap between current home values and California’s outdated homestead exemption amount by increasing the homestead exemption to the greater of $300,000, or the median sale price of a single-family home during the preceding year in the debtor’s county of residence, with such amount not to exceed $600,000 (adjusted for inflation). Additionally, unlike California’s current homestead exemption, the new homestead exemption does not discriminate and will be equally available to all homeowners.
How the Homestead Exemption Protects Your Residence from Judgment Creditors
California’s homestead exemption does not in itself prevent the involuntary sale of a residence by a judgment creditor. Rather, the law ensures that a homeowner will be paid the dollar value of the homestead exemption before the judgment creditor who is forcing the sale receives any of the sale proceeds. This means if a residence has sufficient equity (meaning that it can be sold for an amount that exceeds the value of all priority liens secured against property, estimated costs of sale, plus the debtor’s homestead exemption), courts will typically permit a judgment creditor with a lien on the residence to force a sale of the home. On the other hand, if there is insufficient equity to pay off all superior liens, estimated costs of sale and the debtor’s homestead exemption amount, a judgment creditor will not be allowed to force a sale of the residence.
There are two ways to claim the homestead exemption: (1) via California’s automatic statutory homestead (“Automatic Homestead”); or (2) by recording a homestead declaration (“Declared Homestead”) with the county recorder’s office. While the Automatic Homestead only protects exempt equity in a residence in the context of a forced execution sale, recording a Declared Homestead offers greater rights than the Automatic Homestead. This is because it also protects the exempt amount of equity where the homeowner voluntarily sells the residence and reinvests the exempt sales proceeds by purchasing a replacement residence within 6 months of the sale date.
Given that our homes have become our ultimate sanctuaries during this COVID-19 pandemic, it is comforting to have such an effective yet simple option in our back pockets for protecting a substantial amount of equity in our primary residences. However, it is important to note that the California homestead exemption only applies to liens placed by judgment creditors on a primary residence, and does not provide any protection from forced sales by creditors that hold voluntary liens (such as mortgages or deeds of trusts), mechanics liens, as well as tax liens (such as property tax and federal tax liens). For those who desire ultimate peace of mind, it would be prudent to develop an action plan to protect your family home and hard-earned wealth during these uncertain times.
And if your home equity far exceeds the available homestead exemption, additional planning will be needed to protect the equity in the residence. Contact the law firm if you would like to explore such additional planning strategies.
Jeffrey M. Verdon, Esq.
For more information about any of the information discussed in this Client Alert, or any other income or estate tax planning or asset protection planning assistance, please contact the: Jeffrey M. Verdon Law Group, LLP at firstname.lastname@example.org or 949-333-8143.