Protecting Your Assests Under the Florida Homstead Exemption

What do O.J. Simpson, Burt Reynolds, and Paul Bilzerian have in

common? They all moved to Florida to take advantage of Florida’s

“mansion loophole,” the Florida law permitting debtors to transform

substantial, out-of-state assets into homestead-protected mansions

beyond the reach of creditors.

Florida is considered a debtor’s haven for its constitutionally

guaranteed homestead protection. With no property value

limitation, the Florida constitution allows assets of unlimited value

to be converted into homestead property shielded from forced sale.

The Florida constitution does not exempt homestead property

from every creditor claim. Homestead property is always subject

to enforceable liens for payment of taxes; obligations contracted

for the purchase, repair, or improvement of the property; and

obligations contracted for house, ﬁeld, or other labor performed

on the property. If you acquire a bank mortgage to purchase or

improve your homestead property, the mortgage is considered an

obligation for which you contracted. Therefore, if you default under

the mortgage, the homestead status of the property will not prevent

foreclosure.

This point is worth repeating: The exemption of homestead property

from claims of creditors does not apply to liens you voluntarily

place on your homestead as security for a debt. The exemption

instead protects your homestead from judgment liens arising out of

litigation. If a creditor acquires a judgment in litigation for damages

resulting from your breach of contract or negligent act, the creditor

can enforce the lien of the judgment against your non-homestead

property but not against your homestead property.

In addition to protection from creditor claims, the Florida constitution

affords real property tax beneﬁts to homestead property and places

limits on the conveyance and descent of homestead property. The

rules governing homestead status in these three contexts are not

identical, so property may, for example, qualify as homestead for

creditor-protection purposes but not for conveyance and descent

purposes. This article focuses on protection of homestead property

from creditor claims but also addresses, to a limited extent, the real

property tax beneﬁts.

Protecting Your Assets Under

the Florida Homestead Exemption

~ J. Michael Hartenstine

Williams Parker

REQUISITE IX Wealth Preservation

Requirements for Homestead Exemption from Creditor Claims

Florida residency, property location and size, and ownership and occupancy requirements

must be satisﬁed for property to qualify for homestead protection from creditor claims.

Florida residency. Because the purpose of homestead exemption from forced sale is to protect

families from displacement, you must prove the property is your residence to qualify for

homestead exemption. Residency can be established by declaring and proving intent to

reside on the property permanently. You may ﬁle a declaration of domicile with the local

clerk of court. If you have residential property in another state, you must declare the Florida

property as your principal home, since Florida homestead protection is only available

for your principal residence. You can also demonstrate residency intent by, for example,

registering to vote in Florida and obtaining a Florida driver’s license. Foreign individuals

cannot qualify for Florida residency unless they are Green Card holders. As for married

couples living separately, they may claim two separate homestead exemptions.

Property location and size. The property must be located in Florida. It may be any dwelling,

including a co-op apartment, a condominium unit, a mobile home, or even a boat used as a

primary residence. If the property is located outside the boundaries of a municipality, it may

not exceed 160 acres. If the property is located within a municipality, it may not exceed one-

half acre. If you currently live outside the boundaries of a municipality, any future extension

of the city limits would not reduce your entitlement to homestead protection for up to and

including 160 acres, without your consent.

If homestead property exceeds the size limitations, that part of the property not exceeding

the size limitations will be exempt from creditor claims. If the property reasonably cannot

be physically divided into an exempt portion and a non-exempt portion, a court may order

a sale of the property, in which case the sales proceeds will be distributed based on the

percentage of size of the homestead-protected area as compared to the aggregate size of the

property.

If the property for which you claim homestead exemption exceeds the applicable size

requirement, a court ultimately has authority to determine the portion of the property

actually exempt from creditor claims. In the case of a condominium unit, the property size is

determined by adding (1) the square footage of the condominium land divided by the unit’s

percentage interest in the common elements and (2) the square footage of the unit. It would

be rare for a condominium unit to exceed the acreage limitation. It could potentially arise

in condominium developments with relatively few units that are situated on large tracts of

land within a municipality.

Ownership and occupancy. The property must be owned by a “natural person.” Recent cases

have held property owned by a revocable trust qualiﬁes as property owned by a natural

person, because the settlor maintains a right to revoke the trust and retrieve the property.

By contrast, property held by an irrevocable trust may not qualify absent provisions granting

the beneﬁciary claiming homestead exemption the right to live on the property.

Williams Parker

You do not need to be the sole owner of the property or own the property in fee simple.

Any beneﬁcial interest in the property may be sufﬁcient. A long-term leasehold interest, for

example, will sufﬁce. Property held in joint ownership also qualiﬁes.

Joint ownership typically is categorized as a tenancy in common or a joint tenancy with right

of survivorship. When property is held as tenants in common, each owner’s interest in the

property passes to the owner’s heirs upon the owner’s death. When property is held as joint

tenants with right of survivorship, an owner’s interest in the property passes to the surviving

tenants upon the owner’s death. In either form of joint ownership, some co-owners might

qualify for homestead exemption while other co-owners might not. Creditors of a co-owner

whose interest does not qualify for homestead protection could force a sale of that interest,

thereby introducing a stranger into the joint ownership of the property. Moreover, upon

acquiring the co-owner’s interest, the stranger could force a division or sale of the entire

property through a suit for partition.

In the case of spouses, Florida law presumes that real property acquired jointly during

marriage is owned as a tenancy by the entirety. This form of ownership offers an important

protection. Forced sale of the property may not occur to satisfy individual debts incurred

by either spouse. This protection applies to all property, not just to homestead property.

However, even property held as a tenancy by the entirety is subject to forced sale for claims

incurred jointly by both spouses, unless the property is their homestead.

Claiming Homestead Exemption

When a creditor obtains a judgment in court, the law permits the judgment to become a lien

on the debtor’s property by recording a certiﬁed copy of the judgment in the public records

of the county in which the property is located. The creditor may then commence a suit to

foreclose the lien in a manner similar to the foreclosure of a mortgage. Following a judgment

of foreclosure, the property will be sold by the clerk of court at a public sale, and the sale

proceeds will be made available to satisfy the debt owed to the creditor.

Under Florida Statutes, a debtor may ﬁle in the public records a statement identifying

property qualifying as the debtor’s homestead at any point before the actual sale of the

property. If the debtor has a contract to sell the property or a commitment from a lender for

a mortgage on the property, the debtor may also ﬁle a homestead designation in the public

records. The ﬁling of a homestead designation forces the creditor to ﬁle suit within 45 days

to challenge the homestead status of the property. If suit is not ﬁled within 45 days, the

property may be sold or mortgaged free of the creditor’s judgment lien.

Transfer of Funds and Homestead Property

If homestead property is sold, the proceeds of sale will be protected from creditor claims as

long as the sale proceeds are invested within a reasonable time in new homestead property.

Any excess proceeds that are not invested in the new homestead are not protected. This

was the result in a Florida bankruptcy case in which excess sale proceeds were awarded

to a creditor when the debtor sold his homestead property and bought a less expensive

residence.

A controversial aspect of Florida’s homestead exemption is its extension to debtors who

convert non-protected assets into homestead-protected property in order to hinder, delay,

or defraud their creditors. Because the Florida constitution does not make the homestead

exemption contingent on the debtor’s purpose or intent, the Florida Supreme Court has

REQUISITE IX Wealth Preservation

held that the homestead exemption is applicable even when the debtor acquires homestead

property to defeat creditor claims. However, under fairness considerations, a court may

impose an equitable lien on homestead property if the debtor acquired the property

with funds obtained through fraud or reprehensible conduct. For example, a homestead

purchased with embezzled funds is not exempt from creditor claims.

Bankruptcy

In 2005, in response to the “mansion loophole” and its perceived frequent abuse by

debtors, Congress reformed federal bankruptcy law to restrict the investment of out-of-state

assets into state-protected homesteads. Following that reform, to beneﬁt from the Florida

homestead exemption in bankruptcy court, the debtor must have been a Florida resident for

at least 730 days prior to the ﬁling for bankruptcy. Additionally, if the property was acquired

within 1,215 days from the ﬁling date, the property is only exempt up to a value of $160,375.

These time and value limitations seek to prevent moving assets to Florida for homestead

protection on the eve of a bankruptcy proceeding.

Real Estate Tax Beneﬁts

In addition to its valuable asset protection beneﬁts, homestead status also provides

important real estate tax beneﬁts. For real estate tax purposes, an owner must designate

property as homestead through the property appraiser’s ofﬁce. This designation provides

an annual $25,000 ad valorem tax exemption for all taxes assessed against the property and

an additional $25,000 ad valorem tax exemption for non-school taxes assessed against the

property. Another tax beneﬁt of homestead designation is a maximum 3 percent “Save

Our Homes” cap on annual property valuation increases. For example, if the homestead’s

current assessed value is $1,000,000, the assessed value for the next year cannot exceed

$1,030,000, regardless of actual market appreciation.

Clyde Butcher

Indian Key 6, Everglades National Park

Williams Parker

If homestead property is owned by more than one person as tenants by the entirety or joint

tenants with right of survivorship, and at least one co-owner qualiﬁes for homestead tax

exemption, that co-owner is permitted the entire exemption amount. In contrast, if the

co-owners hold the property as tenants in common, the qualifying owner can only claim an

exemption for such owner’s percentage interest in the property.

A homestead that is transferred to a revocable trust may continue to beneﬁt from homestead

tax beneﬁts as long as the transferor reapplies for the homestead exemption or conﬁrms

eligibility with the property appraiser. Such conﬁrmation often is made by a recitation in the

deed conveying the property to the trust.

Conclusion

Outside federal bankruptcy court proceedings, Florida’s “mansion loophole” remains an

attractive choice for debtors seeking to protect assets from creditor claims. The “mansion

loophole” is far less attractive if the creditor claim is being pursued in the bankruptcy court

due to the 2005 bankruptcy reform law. Subject to bankruptcy law limitations, establishing

homestead in Florida offers signiﬁcant protection from creditor claims, as well as substantial

real estate tax beneﬁts.

Mike is a shareholder with Williams Parker.

He is a board certiﬁed specialist in real estate law and a member

of the Condominium and Planned Development Committee of The

Florida Bar. A graduate of Harvard College and Duke Law School, he

concentrates his practice on commercial and residential real estate

development and related transactions, including condominiums and

planned developments.

The assistance of Barbara Negron, law student at Stetson University, in the preparation

of this article is most gratefully acknowledged.