Homestead Protection Of Insurance Proceeds Paid For Sinkhole Damage

This past week a client asked me about exemption of an insurance proceeds from a claim made on his homestead.  First, a homeowner’s primary house was damaged by a small sinkhole.

The insurance company wrote him a check equal to the repair costs. The homeowner is considering abandoning the home and depositing the check in a bank account while he searches to rent or buy a new home. He asked whether the insurance money is protected in his bank account.

I think that insurance proceeds paid for damage to a homestead represent “homestead equity” and are generally exempt. If the homeowner intends to reinvest the insurance money in a new home then the money is protected in his bank account while he looks for a replacement home for a reasonable time.

If, and when, he abandons the ideal of buying a new home and instead moves into a rental property with a long-term lease I think the money would no longer be exempt under the homestead umbrella. If he rents a space on a short term basis while he searches for a new home to buy then the funds are still exempt- again, for a reasonable time.

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