Can You Save A California Rental Property By Declaring A Homestead?

Can You Save A California Rental Property By Declaring A Homestead?

By |June 26th, 2013|

california homestead exemption shenanigansYou can protect your home in Chapter 7 bankruptcy. Under California law, you may be able to protect real estate from creditors even if you don’t live there. But when you walk into bankruptcy court, the game changes.

The client called from Los Angeles, where she lived. Work had taken her from her home in San Diego, where she owned a home. But the work wasn’t paying enough to cover the bills, and she wanted to file for bankruptcy.

She insisted that she could protect her house using the homestead exemption provided for under California law.

This, in spite of the fact that she was living in a rental in Los Angeles – about 3 hours from the place she was trying to protect.

And in spite of the fact that she had no intention of ever going back there. She was about to get married and settle in Los Angeles, and was renting her property out to help cover the costs.

Under the bankruptcy laws, you can protect your primary residence in Chapter 7 provided that the equity doesn’t go over certain limits.

Because this woman didn’t live in the home, she outsmarted the law by getting her homestead protected in a different way.

Automatic Homestead In California

If you live in a a home that you own, you are automatically given homestead coverage.

You don’t need to do anything, no flag need be planted in the ground and no grand declarations made.

In fact, California Civil Code 704.710 recognizes a homestead to be your principal dwelling.

You say it’s your home, and the law recognizes it as such.

Easy peasy.

Declared Homestead In California

In addition to the automatic homestead provision under California law, you can elect to declare your homestead under California Civil Code 704.910.

To declare your homestead, all you need to do is be either an owner or spouse of an owner and record a homestead declaration in the office of the county recorder of the county where the dwelling is located.

From and after the time of recording, the dwelling is a declared homestead for the purposes of the law unless the homestead is abandoned.

Abandoning A Declared Homestead

There are two ways to abandon a declared homestead under California law.

You can sign a declaration of abandonment. That’s easy enough.

You can sign a new homestead declaration on different property.

That’s it.

Declare Your Homestead On A Rental Property?

If you’re going to route of declaring your homestead under California law, you must reside in the property on the date the homestead declaration is recorded.

There’s no requirement that you actually or continuously reside in a declared homestead after the declaration.

Move out, keep the homestead protection under California law.

Rent it out, same deal.

But Bankruptcy Is Different

My client, smart as she was, couldn’t outsmart the bankruptcy system by declaring her homestead on a rental property.

If you file for bankruptcy and are required to surrender property, that’s a forced sale – not a voluntary one.

The declared homestead provisions of California law apply to voluntary sales only, not to forced sales.

This woman was out of luck. The system declared shenanigans.

Maybe she would have had a better argument if she was away from the home temporarily. Or if she intended to go back there.

But not under these circumstances.

I gave her credit for thinking on her feet, though.

By the way, here are the controlling bankruptcy decisions in case you’re interested:

Image credit:  thepipe26

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About the Author:

I've been a consumer protection lawyer since 1995, working to help people end their bill problems. I'm a faculty member at the Student Loan Law Workshop, a nationally recognized speaker, and a long-time member of both the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.