A reader sent me an email asking if proceeds from the sale of a homestead property would be protected in a bank account if the money were being saved to repair and improve a new property that the reader intended to occupy as homestead when repaired. The property presently was not in liveable condition.
I don’t know of any cases on this point. Proceeds from the sale of a homestead retain homestead character and their creditor protection if the proceeds are deposited in a financial institution and are earmarked for the purchase of a replacement homestead in a reasonable time. When a replacement homestead is purchased a large lump sum of the sale proceeds are applied at one time to obtain the new residence. Remaining proceeds from the sale of the prior property would then lose their protection after the purchase. The repair and improvement of new property can be an extended process ; there is no “closing” as there is with a home purchase.
A debtor could always argue that cash on hand is reserved to repair or improve his homestead. Because the repair and improvement process is indefinite compared to a purchase I think a court would not extend homestead protection to cover funds reserved to repairs and improvements.
Secondly, in the hypothetical fact situation there was not homestead suitable for occupancy when the sale proceeds were deposited. Court have not extended homestead protection to properties not yet ready for occupancy, then money reserved to purchase or build such future homesteads is not protected by homestead law. Although courts liberally interpret homestead protection I think that more likely than not money set aside to repair a property to the point where it would be ready for occupancy would be subject to creditor claims.
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