The California homestead increase effective January, 2021brought the homestead closer into line with the cost of a home in the Golden State.
It’s a change for the better. But how will the change impact the balance of homestead law? Time, or further legislation, will tell.
The newly enacted version of California Code of Civil Procedure 704.730 replaces the previous homestead system that pegged the amount of the homestead to family relationships, including marriage, to age, or to health.
All of that was eliminated in favor of a system that simply provided everyone with a principal residence gets a homestead in the amount of at least $300,000. And in counties where the median sale price of homes is more than $300,000, an exemption equals the median price of a home, not to exceed $600,000.
Even better, the floor and the cap increase annually with inflation. In 2023, the floor is $339,196 and the cap is $678,391.
The new homestead provision in CCP 704.730 as enacted reads:
704.730. (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.
What the legislation inconveniently forgot is an authoritative source for “median sales price”. The best source appears to be the California Realtors market data.
Who qualifies for a homestead?
The economic interest of anyone in a principal dwelling is protected, so long as that person, or the person’s spouse lives there, regardless of who else lives there as well.
As part of the old system, the definitional section of the California homestead law contains a definition of a “family unit” that allowed an unmarried homeowner to a homestead equal to that of a married couple, if that person was part of a family unit.
That appears to be surplusage as the new exemption doesn’t use the composition of the household residing in the homestead to determine how much value is protected.
The definition of a homestead is unchanged: it is the principal dwelling of a judgment debtor, or the judgment debtor’s spouse. So, homestead protection for the home in which only one spouse lives is preserved.
Also unchanged is the exclusion from the definition of “spouse” of a married person following entry of a judgment of legal separation.
Creditors with pre-increase claims
How about the rights of creditors whose claim arose under the old law?
Do they have a fixed right to limit the homestead to the amount protected when the debt was incurred?
The short, broad answer is no. Unsecured creditors have no vested right to the benefit of a law that’s been superseded. San Diego White Truck Co. v. Swift, 96 Cal.App.3d 88 (Cal. Ct. App. 1979)
Under state law, the exception is the creditor who has a recorded judgment lien which has attached to a declared homestead as defined in CCP 704.910. The homestead increase is not effective against a creditor with a lien recorded before the effective date of an amendment to CCP 704.730. See CCP 704.965. See In re Morgan, 157 B.R. 467 (Bankr. C.D. Cal. 1993).
But, in a bankruptcy case, the enhanced homestead is effective against all creditors. A debtor can avoid a lien of whatever age that impairs the homestead exemption. 11 U.S.C. 522(f). Barclay v. Boskoski, 52 F.4th 1172 (9th Cir. 2022).
Reinvestment requirement remains
Unfortunately, the requirement that homestead proceeds be reinvested in a principal residence within 6 months of receipt remains.
For the automatic homestead, available without recording a declared homestead, that requirement is found in CCP 704.720.
For the declared homestead, see CCP 704.960.
As a practical matter, the increase in the amount of the homestead should make it more feasible for a homeowner to actually acquire a new home within six months, assuming they have significant exempt proceeds.
However, a homeowner who has had to invoke the homestead to protect proceeds of a sale may still find reinvestment difficult if the proceeds are smaller.