This article examines California’s homestead laws and suggests improvements to provide greater protection for homeowners’ hard-earned home equity.

Homestead exemptions: the basics

Two types of homestead procedures are available to California homeowners. These are the:

  • declaration of homestead, which is recorded [Calif. Code of Civil Procedure §704.920; see RPI Form 465]; and
  • automatic homestead, also called a statutory homestead exemption, which is not recorded. [CCP §704.720]

Consider a homeowner with $50,000 of equity in their principal residence. The homeowner has a credit card balance of $20,000 and is unable to make payments. The credit card company pursues the money in court, seeking to force the sale of the home to obtain the money owed.

However, creditors seeking to collect a debt may not force the sale of a home when the home’s equity is less than the homestead exemption.

The homestead exemption gives a homeowner priority rights to preserve the equity in their home from loss due to a creditor’s foreclosure on a judgment lien recorded after the declaration. The equity is preserved up to the exemption amount.

On the other hand, when the home’s equity exceeds the homestead exemption amount, the creditor may be able to force the sale of the home. But the equity dollar amount will be protected up to the amount of the homestead exemption. Then, the homeowner will have six months to reinvest that amount in another primary residence.

Both the automatic homestead and declaration of homestead arrangement provide the same dollar amount of home-equity protection in California. However, a homeowner needs to record a declaration of homestead to receive all the benefits available under the homestead laws. These benefits allow homeowners the right to sell, receive the net sales proceeds up to the dollar amount of the homestead and reinvest the funds in another home.

For a homeowner to qualify for a declaration of homestead:

  • they need to occupy the home as their principal residence at the time a judgment is recorded; and
  • when married, at least one spouse needs to continually reside in the home until the court determines their home is a homestead. [CCP 704.710(c)]

A declaration of homestead in no way restricts the homeowner’s ability to voluntarily sell, lease, or further encumber their homesteaded property. [CCP §704.940]

California’s homestead exemption: is it enough?

As of January 1st, 2021, California homeowners qualify for a net equity homestead protection of:

  • up to $300,000; or
  • the median sale price for a single family residence (SFR) in the homeowner’s county in the calendar year prior to the year in which they claim the exemption, not to exceed $600,000 (adjusted annually for inflation). [CCP §704.730]

For example, when the county’s SFR median sales price is $514,000 — and thus falls in the $300,000-$600,000 range — the homestead exemption in the following year is $514,000. When the median sales price falls below $300,000, it is still $300,000. But when the median sales price exceeds $600,000, the homestead exemption in the following year is $600,000.

Prior to 2021, the homestead exemption ranged from $75,000 to $175,000. This increase in equity protection considerably increased the amount homeowners may exempt from a forced sale of their home in the event of a creditor enforcing judgment.

And yet, some states have unlimited homestead exemption amounts — meaning, a creditor may never force the sale of a home, no matter the amount of equity the homeowner possesses. The biggest states with unlimited exemptions are Florida and Texas.

In the Golden State, the average home value is a whopping $750,000 as of January 2022, according to Zillow. In many parts of the state, the average home value is north of $1 million. This means that, for many homeowners, the maximum $600,000 homestead exemption is woefully inadequate to provide full protection from the loss of their home. This is especially true for older homeowners who have gained equity in their home over the course of years of homeownership.

firsttuesday proposes increasing the homestead exemption further. When the home is off limits to creditors, homeowners will sleep soundly at night knowing their shelter is secure, not tempted to move to another state like Texas or Florida where their shelter will receive full protection.

In 2022, we are looking down the barrel of a volatile economy, with rising interest rates, high inflation and unstable asset prices — all “bolstered” by a fragile jobs market, which has yet to recover from the 2020 recession. As medical and personal debts accrued during the jobless months of 2020-2021 become due and creditors begin to pursue these debts, California homeowners will increasingly need the security of the homestead exemption.

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