Homestead Questions: Size Within City And Ownership Period For Bankruptcy

A client asked me two homestead questions which questions I have previously heard from other clients or email inquiries. This client owned a homestead with significant equity within a municipality. Homestead properties within a city up to ½ acre in lot size are protected under the Florida Constitution. The client said he intended to buy a ½ acre lot adjoining this existing homestead as an investment, and he wanted to know if the lot would be protected from creditors. My opinion is that the lot purchase would jeopardize the homestead protection of his existing house. Homestead includes the property upon which your residence is located as well as all contiguous land. If the client purchased the adjoining lot and took title in his own name the adjoining lot would be incorporated into his homestead and the size of his entire homestead would increase from ½ acre to a full acre. Thereafter, only 50% of the total homestead would be protected within the city limits. The client could not apportion protection to the original lot on which the house is situated.

The purchase of the contiguous lot in his own name would forfeit protection of 50% of his house value. A better strategy would be to form a limited liability company and have the LLC purchase the adjoining lot. Because the client does not personally own the new lot it would not add to the size of his homestead. Land owned by entities, as opposed to natural persons, cannot be homestead property. The LLC would give some, although imperfect, asset protection.

The second question concerned the bankruptcy rule that requires a bankruptcy debtor to own a homestead property for 40 months in order to get unlimited homestead protection in bankruptcy court. If a debtor owns homestead 1, sells homestead 1 for a profit, invests the profit in homestead 2, and then files bankruptcy, the time of homestead includes ownership of homestead 1. A client posed the following question: the client owned homestead A for many years. During the real estate crash he did a short-sale of homestead A and immediately purchased homestead B with new money. The client believes that since he can continuously owned a Florida homestead, including A and B, for more than 40 months he should have unlimited homestead exemption in homestead B. I don’t think the law is intended to add the ownership period of homesteads A and B in this example because no equity from A was invested in B. Ownership periods are grandfathered when the debtor transferred equity (sales proceeds) from one homestead to a new homestead. Investment of money other than homestead sales proceeds begins anew the ownership clock for purposes of the Florida homestead exemption– that’s my interpretation.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

About the Author

Jon Alper is an expert in asset protection planning for individuals and small businesses.

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