Most people know that Florida provides special tax treatment for homestead property. A more important benefit might be Florida’s Constitution protection from creditor claims. Article X, Subsection 4 provides that Florida homestead property is exempt from forced sale under process of any court and that no judgment can be a lien against homestead except for payment of taxes and assessments on the property, obligations contracted for purchase, improvement or repair of the homestead or obligations contracted for house, field or other labor performed on the homestead. Homestead property is limited to one–half acre within city limits and 160 acres of contiguous land outside of a city.
Homestead is the residence of the owner or the owner’s family. The Constitution provides that the exemption passes to the surviving spouse or heirs of the owner, so creditors cannot reach homestead passing to a surviving spouse or heirs by filing a claim with the decedent’s estate. If the homestead does not pass to the spouse or heirs of the owner, it is subject to creditor claims just like any other estate asset.
Florida courts explain the purpose of the homestead exemption from creditor claims is protecting the family by making sure the owner of the homestead will not lose his or her home due to creditor problems. The public policy of Florida is to protect this most vital asset and help keep individuals from becoming wards of the state. Creditors may be harmed, but the public at large benefits and that is considered to be in the best interest of Florida.
Many seeking to escape the clutches of creditors have moved to Florida and used their liquid assets to buy a Florida home. Florida courts have protected those purchases from claims of creditors. That got the attention of Congress. Debtors have the option of choosing state or federal exemption from creditor claims when filing bankruptcy. Over the year, debtor moving to Florida to escape creditors could claim the unlimited Florida exemption from creditor claims for homestead property, go through bankruptcy, sell or mortgage the house and use the proceeds free from creditor claims. The bankruptcy laws were amended to limit the exemption to $170,350 if the homestead was not owned for at least 40 months prior to filing the bankruptcy. The limit is adjusted every 3 years.
Homestead is one’s primary residence. That has led to some interesting court cases. The difference between a recreational vehicle and a mobile home is enough so that Florida courts generally agree mobile homes can be homestead but recreational vehicles are not. The courts generally look to the permanency of attachment to the land in deciding these cases. The courts have also dealt with boat owners claiming their boats are homestead. Florida courts have reached divergent opinions on the boat issue, but it appears less likely a boat can be claimed as a homestead if it is primarily a pleasure boat and used for transportation as opposed to a boat that is used primarily as a residence.
The Constitution protects residential property, but only within the prescribed size limits. That has led to court cases attempting to divide the protection when the size of the property exceeds the constitutional limit or part of the property is used for commercial purposes. When the property exceeds the acreage limit, courts have ordered the property sold and the proceeds allocated between homestead and non-homestead portions.
Joint use for residential and commercial purposes is more complicated. Property’s use can be clearly identified, courts have ruled the commercial portion is not exempt from creditor claims. The courts have tended to side with the debtor when the property’s use for the debtor’s business is incidental to use as a residence, such as when the debtor operates his business out of the home or even when the debtor sells trees grown on the land.
The debtor is not “locked–in” to a particular property for protection from creditors. Homestead can be sold, and the proceeds protected as long as the proceeds will be used to purchase a replacement homestead in Florida. Florida has followed that rule to the point that even proceeds held for years have been protected.
Florida courts and bankruptcy courts have generally agreed that proceeds from sale of homestead are exempt from creditor claims only if held and used for acquisition of a replacement homestead. Florida’s Supreme Court first confirmed that concept in 1962. That year, the court opined that proceeds from sale of a homestead must be placed in a separate account earmarked for acquisition of replacement homestead and then used to buy the replacement homestead
In 2016, Florida’s Supreme Court allowed investment of funds from a special account held to by homestead into mutual funds and stocks. The court explained that in 2016, bank accounts did not generate any significant growth and requiring funds to be stuck in a bank account would be unreasonable. That should not be considered as allowing debtors to use homestead sale proceeds for investment purposes but only protects them if earmarked for acquiring replacement homestead. The 2016 Florida Supreme Court decision involved an account with Wells Fargo clearly designated for acquisition of replacement homestead but under which the bank was authorized to invest in stocks.
Even though Florida’s Constitution has expansive language protecting homestead property, Florida courts have carved out exceptions where the homestead owner is guilty of bad acts. Where funds used to buy homestead were obtained by fraud or other wrongful acts, the courts have allowed the wronged creditor to reach homestead. Courts have also ruled homestead not protected when used in an effort to thwart marital settlement agreements. However, Florida has not frowned on investing funds into a homestead as a creditor protection device when the investment was clearly intended to avoid one’s creditors. Absent particularly egregious action by the debtor, the homestead protection stands strong.
Florida’s protection for homestead property is a powerful shield against creditors. The limited exceptions carved out by courts do little to reduce the protection. Constitutional protection is often an unwelcome surprise to out-of-state creditors but provides financial security for those facing unplanned expenses. It is not merely the sharp operation investing in a homestead that is protected. It also protects those facing unexpected medical bills and similar liabilities. Homestead protection is an important part of Florida law.
William G. Morris is the principal of William G. Morris, P.A. William G. Morris and his firm have represented clients in Collier County for over 30 years. His practice includes litigation and divorce, business law, estate planning, associations and real estate. The information in this column is general in nature and not intended as legal advice.