Q. I hear there has been a change in the state Homestead Law. Can you comment?
A. Yes, indeed. A new Homestead Exemption went into effect at the beginning of 2021, and it is good news for California homeowners. But first, a bit of background for those readers who might not be familiar with the “Homestead”.
The Homestead is the amount of protection available for home equity as to homeowners who might be faced with claims by unsecured creditors seeking to enforce payment of an unpaid debt. Unless the homeowner’s equity in his or her home is greater than the amount of the applicable exemption, the creditor cannot force a sale of the home to collect that debt. Similar protection is available to homeowners who file Bankruptcy. This protection is called the “Homestead Exemption”.
Until January of this year, the homestead exemption was quite low: $75,000 for an unmarried individual, $100,000 for a married couple, or $175,000 for the disabled or those over age 65. Now, under AB 1885, signed by Governor Gavin Newsom on September 18, 2020, it has been increased dramatically, as follows: the new minimum is now $300,000, but this may rise to as much as $600,000 in your own county, based upon the countywide median sale price for a single-family home in the prior calendar year in which you claim the exemption.
While the new law does not specify the index from which to ascertain the median sale price, one might do a simple internet search and pull up the data from any local association of realtors. I just did this and, from at least one data base, the median sale price for homes in Alameda County as of December, 2020, was $1,174,488. Thus, it is clear that, at least in Alameda County, the exemption would clearly be available at the current maximum of $600,000. One can pull up the same information for other California counties. Further, this $600,000 upper limit will be further adjusted each year by an inflation index, i.e. the California Consumer Price Index for All Urban Consumers, published by the Department of Industrial Relations.
So, in California Counties with high home values, the current exemption is as high as $600,000, and this cap will be adjusted annually for inflation in subsequent years.
There are two ways to claim a Homestead Exemption: (a) via an Undeclared, sometimes called an ‘automatic’, exemption, or (b) by a recorded or “Declared” Homestead Exemption. The difference is that the latter will protect you for six months after you sell, so as to protect your home sale proceeds and allow you to transition into the purchase of another home, where you can then also claim the exemption. Thus, the better plan for folks concerned about this protection in the event of sale is to record a Declared Homestead in the county in which your existing home is located; upon sale, promptly record it again for the new home.
There are some items to note:
1) This new Exemption will not protect against forced sale by secured creditors, e.g. the lender who gave you a loan to help you buy or refinance your house, or a lender for whom you put up your home as collateral for a loan.
2) An undeclared Homestead won’t protect you if you choose to voluntarily sell your house. The protection only applies in the case of a forced sale, i.e. by judicial foreclosure. But a Declared Homestead will give you 6 months of protection, as noted above;
3) This new state exemption will not protect you from federal actions, e.g. by IRS efforts to collect back taxes owed.
I hope this helps.
References: AB 1885