2021: Say Hello to California’s New Homestead Exemption
Currently, partial equity in a home in California is exempt from being used to pay a judgment lien on the property. That partial exemption is either $75,000, $100,000 or $175,000, depending on a variety of factors, including marital status, age, income, etc.
But as of January 1, 2021, that confusing scheme goes away. Governor Gavin Newsom approved Assembly Bill 1885, which amends Section 704.730 of California’s Civil Code as follows:
(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 ($300,000).
(b) The amounts specified in this section shall adjust annually for inflation, beginning on January 1, 2022, based on the change in the annual California Consumer Price Index for All Urban Consumers for the prior fiscal year, published by the Department of Industrial Relations.
Essentially, the exemption amounts have been raised significantly, and will adjust for inflation in the future. But what does all of this mean for California homeowners?
No Mandatory Move to Schitt$ Creek
The homestead exemption provides a certain amount of protection from judgment creditors – those creditors who sued in court and obtained a legal judgment to collect money owed. A judgment creditor has the right to take several actions to collect the debt, including selling assets like vehicles and real estate.
Under the new law, $300,000 – $600,000 of a home’s equity can’t be touched by judgment creditors. The amount depends on the median sales of homes in the county where the property is.
In the case of the Rose family from Hulu’s popular comedy Schitt$ Creek, a judgment creditor could force the sale of the Rose’s Beverly hills mansion, but the Rose family would still have up to $600,000 to relocate to a less expensive city in Los Angeles county, or beyond. (Currently, the LA County median home value is just under $700,000, according to Zillow. Also, it wasn’t a judgment creditor who came after the Rose’s assets – see #3 below.)
The Devil in the Details
There are some caveats:
- Those who use their homes as collateral for loans will not be protected by AB 1885. The lender will have the right to foreclose, and the borrower will not qualify for the exemption.
- Home owners who choose to sell their homes also won’t be protected from judgment creditors – the homestead exemption only applies in the case of a forced sale.
- State law does not protect from federal actions. In the first episode of Schitt’$ Creek, “revenue” agents come to the Rose mansion to seize assets. The storyline indicates Johnny Rose’s trusted business manager embezzled the company fortune and failed to pay federal taxes. So if the IRS or other federal agencies are seizing and selling property, AB 1885 won’t help.
The current homestead exemption in California is automatic, homeowners don’t necessarily have to file a homestead declaration with the County Clerk. However, if a homeowner does file a declaration, the homestead’s equity isn’t lost after the home sells — whether that sale is involuntarily or voluntarily. Moreover, if a declaration is filed, proceeds from selling the home are protected for six months after the sale.
For these reasons, if there’s equity in the home it’s wise to file a homestead declaration if there are serious financial problems. The new law does not seem to contradict or confirm this – but since nothing appears as yet to overturn this rule of thumb, it’s best to file the declaration if needed.
Kira S. Masteller is a Shareholder in our Trust & Estate Planning Practice Group.