California Homestead Exemption: Minimum of $300k and Maximum of $600k
The California homestead exemptions allow homeowners to protect a certain amount of equity from debt collection. This applies to state law debt collection as well as affording debtors in bankruptcy the ability to protect their homes from forced sale by the trustees or at least limit the amount of equity trustees can go after.
Under the old exemption law, homeowners could protect $75k for a single person, $100k for a family of at least two, and $175k for those who are elderly or disabled. As of January 1, 2021, the homestead exemption increased to a minimum of $300k and a maximum of $600k depending on which county you live in. The exact amount of the exemption is set by the countywide median sales price for a single-family home in the prior year – again, capped at between $300k to $600k. Using figures published by the California Association of Realtors, these exemptions in Southern California are as follows:
- Orange County: $600,000
- Riverside County: $457,474
- San Bernardino County: $343,638
- Los Angeles County: $600,000
- San Diego County: $600,000
CCP §704.730
(a) The amount of the homestead exemption is the greater of the following:
(1) The countywide median sale price for a single-family home in the calendar year prior to the calendar year in which the judgment debtor claims the exemption, not to exceed six hundred thousand dollars ($600,000).
(2) Three hundred thousand dollars ($300,000).(b)The amounts specified in this section shall adjust annually for inflation, beginning on January 1, 2022, based on the change in the annual California Consumer Price Index for All Urban Consumers for the prior fiscal year, published by the Department of Industrial Relations.
Limitations on Homestead Exemptions in Bankruptcy
The 1,215 day look-back period ($170k)
This is by far the most common situation where a homestead exemption can be reduced since it is so easily proven and applies to many situations where debtors have recently purchased property. Although the California state law provides for the homestead exemption that is available in bankruptcy, the Bankruptcy Code places certain limitations on how much of the exemption can be claimed in a bankruptcy.
This code section was enacted to close what had been known as “The Mansion Loophole,” which was a mostly false perception that wealthy individuals with large amounts of home equity in a state that has a small homestead exemption, which in some states this can be as little as $0, would move to a state with a larger homestead exemption, which in some states can be unlimited. In order to try and close this “loophole”, Congress enacted Section 522(p)(1) which places a $170,350* cap on homestead exemptions if you acquired the property within 1,215 days prior to filing bankruptcy. Essentially, the reasoning is that if you want to move to a state in order to take advantage of that state’s homestead exemption, you’ll have to live there for more than about 3.3 years.
* This amount is periodically adjusted from $125,000 and is currently $170,350 as of April 1, 2019
Now, you might be thinking that The Mansion Loophole does not apply to your situation because you aren’t extravagantly wealthy or own a mansion, but due to the law being poorly drafted, it places a limit on more situations than what it was intended for. Notably, it limits people who acquired their property within 1,215 days of filing bankruptcy, but who have not been moving around the country in order to take advantage of different homestead exemptions.
Taking a step back, the current median home value across the nation is approximately $270k. So the $170k homestead exemption cap covers approximately 60% of that value. However, Southern California’s home values are much higher. In Orange County, the median home value is approximately $855k to $900k, and the homestead exemption cap only covers approximately 18-20% of this value. In other words, the law applies more harshly in areas with higher home values.
There is one exception to this limit which is §522(p)(2) which allows for a “rollover” from a prior residence. This exception states that the limit does not include the amount of equity in a property that is attributed to the proceeds of the sale of the previous residence within the same state. This was intended to allow people to freely move around within a state without being forced to wait another 1,215 days to file bankruptcy, so long as the original purchase was outside of this period.
It is important to note that the California homestead exemption is not capped under state law and the cap only applies when a person is filing bankruptcy.
11 U.S.C. §522(p)
(p)(1)Except as provided in paragraph (2) of this subsection and sections 544 and 548, as a result of electing under subsection (b)(3)(A) to exempt property under State or local law, a debtor may not exempt any amount of interest that was acquired by the debtor during the 1215-day period preceding the date of the filing of the petition that exceeds in the aggregate $125,000 in value in—
(A)real or personal property that the debtor or a dependent of the debtor uses as a residence;
(B)a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence;
(C)a burial plot for the debtor or a dependent of the debtor; or
(D)real or personal property that the debtor or dependent of the debtor claims as a homestead.(2)
(A)The limitation under paragraph (1) shall not apply to an exemption claimed under subsection (b)(3)(A) by a family farmer for the principal residence of such farmer.
(B)For purposes of paragraph (1), any amount of such interest does not include any interest transferred from a debtor’s previous principal residence (which was acquired prior to the beginning of such 1215-day period) into the debtor’s current principal residence, if the debtor’s previous and current residences are located in the same State.
Actual intent to hinder, delay, or defraud creditors (unlimited cap)
Bankruptcy Code section 522(o) is based on a look-back period of 10 years and the cap is not a defined amount. As the law states, a homestead exemption can be reduced by an amount which can be shown as being the result of “intent to hinder, delay, or defraud a creditor” and from property “that the debtor could not [otherwise] exempt”.
On the element of intent, since a court cannot read your mind, the intent element would need to be proven by circumstances indicating the necessary intent. These circumstances are often referred to as “badges of fraud”, and would include things like hidden transfers and bad faith acts which frustrate creditors’ attempts to collect. When laws use a word that does not have a clearly defined meaning, like “intent”, “good/bad faith”, “abuse”, and “reasonable”, this opens the door to a determination by the judge rather than a predetermined outcome based on the language of the law, such as the previously mentioned §522(p) cap.
On the element of whether the property could have been claimed as exempt, this is very easy to prove. If a bank account had several hundred thousand dollars in it, you would not be able to claim this as fully exempt under any available exemption law, at least in California. If that money is then transferred in real estate and you are able to claim a more significant portion of it as exempt, then this element is satisfied.
Because a determination of intent is so difficult to prove, these proceedings are more rare than the §522(p) cap as they can cause trustees and/or creditors to incur significant costs of litigation without a definite outcome.
11 U.S.C. §522(o)
(o)For purposes of subsection (b)(3)(A), and notwithstanding subsection (a), the value of an interest in—
(1)real or personal property that the debtor or a dependent of the debtor uses as a residence;
(2)a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence;
(3)a burial plot for the debtor or a dependent of the debtor; or
(4)real or personal property that the debtor or a dependent of the debtor claims as a homestead;
shall be reduced to the extent that such value is attributable to any portion of any property that the debtor disposed of in the 10-year period ending on the date of the filing of the petition with the intent to hinder, delay, or defraud a creditor and that the debtor could not exempt, or that portion that the debtor could not exempt, under subsection (b), if on such date the debtor had held the property so disposed of.
Conviction of a felony and abuse of bankruptcy ($170k)
Bankruptcy Code section 522(q)(1)(A) is also a $170k cap, but is not subject to a specific look-back period. Section (1)(A) states that a homestead exemption can be capped at $170k if the court determines that the debtor was convicted of a felony and circumstances which demonstrate that the debtor is abusing bankruptcy. Similar to the preceding homestead cap, there are two elements here. The first one is a conviction of a felony, which is very easy to prove since you can just pull up someone’s criminal record. The second element of “abuse of bankruptcy” is another element that is very difficult to prove, can result in costly litigation, and does not have a certain outcome. For this reason, this limitation is also very uncommon.
There is a small exception to this which is that the cap can be loosened to the extent that the property is “reasonably necessary for the support of the debtor and any dependents of the debtor”. This is also another element that is difficult to prove. If a person is elderly and relies on a fixed income, the property will be more necessary for their support. If a person is young and has a higher income, then the property is going to be not as necessary for their support.
Criminal act, intentional tort, or willful and reckless injury/death ($170k)
Bankruptcy Code sections 522(q)(1)(A)(i) – (iii) refer to obscure violations of federal law. However, sub-section (iv) is more common and can cap a homestead exemption to as little as $170k to the extent that the debtor has incurred a debt within the past 5 years that is the result of a “criminal act, intentional tort, or willful or reckless misconduct that caused serious physical injury or death”. If a person has been convicted or had a judgment rendered against them that explicitly requires one of these elements, then this is easy to prove. However, if there has not been a final determination by a court, then this also enters the realm of being difficult and costly to prove.
This section is also subject to the “necessary for support” limitation on the cap.
The “Vanishing Homestead Exemption”
Under the California homestead exemption, the exemption attaches to the proceeds resulting from certain sales of property, but this exemption will only attach to those proceeds for six months unless the proceeds are reinvested into another residence. If you are in a situation where the trustee has forced the sale of your property, you will be paid your exemption and the trustee will mark six months and one day on their calendar to check in and see whether you have reinvested the exempt proceeds. If you have not reinvested the proceeds, then you will lose the full amount of the exemption and the trustee will force you to turn over the previously exempt amount of the proceeds. This is a very harsh rule, especially when a person is in bankruptcy and will likely have more difficulty purchasing a new home.
This reinvestment rule is sometimes referred to as “The Jacobson Issue”, named after the case Wolfe v. Jacobson (In re Jacobson), 676 F.3d 1193 (9th Cir. 2012).
California Code of Civil Procedure §704.720
(a) A homestead is exempt from sale under this division to the extent provided in Section 704.800 .
(b) If a homestead is sold under this division or is damaged or destroyed or is acquired for public use, the proceeds of sale or of insurance or other indemnification for damage or destruction of the homestead or the proceeds received as compensation for a homestead acquired for public use are exempt in the amount of the homestead exemption provided in Section 704.730 . The proceeds are exempt for a period of six months after the time the proceeds are actually received by the judgment debtor, except that, if a homestead exemption is applied to other property of the judgment debtor or the judgment debtor’s spouse during that period, the proceeds thereafter are not exempt.
