Homestead protection in California is a legal provision that effectively shields a percentage of your primary residence’s equity from creditors, in the event of an adverse judgment. This protected amount is referred to as the “homestead exemption.” For example, let’s say your California residence is valued at $700,000 and you owe $300,000. This means your equity would be $400,000. In the event of a lawsuit judgment against you, the California homestead protection in most counties would shield that $400,000 equity from a creditor that attempts to collect on a judgment.
How the California Homestead Exemption Amount is Calculated
The amount of equity shielded from creditors under California homestead laws will fluctuate based upon the county. On January 1, 2021, the standard homestead exemption increased from $75,000 to a range from $300,000 to $600.000 adjusted for inflation. As of April 1, 2023, the homestead exemption has adjusted to $313,000 to $678,391, depending upon your county. The amount is determined by the countywide median sale price for a single-family home in the calendar year prior to the year the debtor claims the exemption.
These exemption amounts adjust annually for inflation based on the California Consumer Price Index. This is why it is important to monitor the current exemption limits in your county to understand exactly how much of your home equity is protected under the California homestead law.
The most current list of homestead exemptions by county in California can be found here.
Two Types of Homestead Protection in California
In California, there are two types of homestead protections available to residents: (i) automatic homestead and (ii) declared homestead. Both forms of homestead can help to shield your home equity from creditors, but they work differently and offer varying levels of legal protection. Let’s discuss each.
1. Automatic Homestead
An automatic homestead applies if you reside in the home you own in California. You do not need to take any specific steps to enjoy the legal protections and benefits from the automatic homestead in California. This protection is automatically in place and applies to your home’s equity up to the amount described above. The automatic homestead remains in effect as long as you live in the home and will protect your equity until you decide to sell the home.
2. Declared Homestead
A declared homestead offers additional protection if you decide to sell your home. To create a declared homestead, you need to file a legal form with your county’s Registrar-Recorder office. Filing a declared homestead enables you to protect a portion of the sale proceeds for up to six months after selling your home. However, you must meet the following requirements:
- You sell your home and purchase a new one within six months.
- The protected equity amount is used to purchase the new residence.
- You file a homestead declaration on the new home.
A declared homestead ensures that even if you sell your current home, some equity is safeguarded to help you purchase a new home and are not at risk of becoming homeless due to a judgment. A declared homestead can be particularly helpful if you are facing a lawsuit or have a large judgment against you. If you need to sell your home under these circumstances, the declared homestead protects a portion of your proceeds for six months, giving you time to reinvest the protected funds into a new property. Without a declared homestead, creditors could potentially claim your entire home equity as part of the collections process.
California Homestead Protection Exceptions
There are notable exceptions and limitations associated with the California homestead law. For example, the homestead law does not protect your home’s equity in the following circumstances:
- Mechanic’s liens: If you fail to pay for work done on your home, contractors can enforce mechanic’s liens. The homestead protection does not apply.
- Foreclosure by your mortgage lender: If you fall behind on mortgage payments, California’s homestead laws do not restrict or prohibit the foreclosure process.
- Spousal support and/or child support judgments: If you owe unpaid child support or spousal support, then a creditor can still seek collection on the amount owed and possibly access the equity in your home.
Is it Possible to Protect My Residence if My Equity is Greater Than The Homestead Exemption?
In the prior example used above, what if your California residence is valued at $1,200,000 and you owe $300,000. This means your equity would be $900,000, which is greater than any California county’s homestead exemption amount. This means it is possible that a successful plaintiff can record a judgment and initiate foreclosure. In such an instance, your $300,000 mortgage will be repaid from the sale, you will receive your county homestead exemption amount and the plaintiff will keep the excess equity in your home.
If the equity in your primary residence is greater than your homestead exemption amount, there are options to protect your residence from lawsuits. The most common methods include lowering the equity in your home, utilizing a special irrevocable trust, or a limited liability company. However, each option has advantages and disadvantages you should carefully consider. It is important to consult with an experienced asset protection attorney to determine the best option for you.
Have Questions? Contact an Experienced Asset Protection Attorney About Your Rights and Obligations Under the California Homestead Exemption
Homestead protection in California serves as a valuable legal safeguard for homeowners against lawsuits. However, with increasing home prices in California, many residents have equity in excess of the homestead exemption.
If you desire to protect your excess home equity from lawsuits, now is the time to speak to an experienced and knowledgeable asset protection attorney.
At Skabelund, our team of skilled and knowledgeable asset protection attorneys understand the importance of preserving and safeguarding your hard-earned assets, including the equity in your home. We’re laser focused on providing personalized strategies tailored to your specific needs and goals.
We have helped a myriad of clients and managed estates valued over $100 million. Our legal team is experienced in protecting one of the most valuable assets you own – your home.
