Florida's unlimited homestead exemption does have some limits.

• Author: Nelson, Barry A.
• Position: Part 1

In recent articles discussing high-profile corporate malfeasance and accounting scandals, the use of Florida's unlimited homestead exemption to avoid creditors' claims has been noted with concern. (1) Often referring to it as a legal loophole, detractors of the unlimited homestead exemption point out that the exemption permits debtors to divert substantial assets to the purchase of new and extravagant homes that can be shielded from creditors under Florida's state constitution. The Washington Post, (2) on July 12, 2002, reported that Scott D. Sullivan, former CFO of WorldCom, is building a $15 million Boca Raton "mansion" that may qualify for homestead exemption status. Yet, concerns about Florida homestead detailed in the national press are nothing new. For example, in 1991, The New York Times reported that Bowie Kuhn, the former Major League Baseball Commissioner, had sold his $1.2 million New Jersey home and within weeks had bought a similar estate in Florida to shield his assets before then filing for bankruptcy. (3) These and many other articles express concern that debtors can avoid creditors by moving to Florida, purchasing a new home and establishing residency.

While some may benefit from such planning, many debtors, as well as reporters writing about them, are unaware of the requirements that must be satisfied to obtain the benefits of Florida's homestead exemption. This article will discuss the limits of Florida's existing homestead exemption for asset protection. As such, Part I of this article will focus on the exemption provided by the Florida Constitution in Art. X, [section] 4 and its legislative implementation by the F.S. ch. 222. It will not discuss Florida's homestead exemption for purposes of ad valorem taxation, which is found in the F.S. ch. 196.

In Part II, the article will discuss certain federal limitations on the homestead exemption (such as federal tax liens), fraudulent transfer issues, and proposed federal bankruptcy legislation that would severely limit homestead protection for non-Florida debtors seeking to establish domicile and move to Florida to avoid creditors. In addition, Part II will discuss planning to take advantage of homestead and conflicts that can arise in that context between professional advisors who may have different views. Some advisors may recommend owning a homestead with little mortgage debt, while others may recommend owning the homestead with a significant mortgage in order to benefit from mortgage interest deductions for federal income tax purposes and from the ability to enhance other investments through funds that are not tied up in home equity. While there may be merit from a financial and tax standpoint to place a large mortgage on a homestead, those concerned with asset protection may find that having no mortgage, or a small mortgage, on their homestead provides peace of mind that is more important than the tax and financial advantages.

Florida Constitution

Art. X, [section] 4 of the Florida Constitution sets forth the homestead exemption. It states:

(a) There shall be exempt from forced sale under process of any court, and no judgment, decree or execution shall be a lien thereon, except for the payment of taxes and assessments thereon, obligations contracted for the purchase, improvement or repair thereof, or obligations contracted for house, field or other labor performed on the realty, the following property owned by a natural person:

(1) a homestead, if located outside a municipality, to the extent of 160 acres of contiguous land and improvements thereon, which shall not be reduced without the owner's consent by reason of subsequent inclusion in a municipality; or if located within a municipality, to the extent of one-half acre of contiguous land, upon which the exemption shall be limited to the residence of the owner or the owner's family.

There are thus three significant requirements that the courts must consider in order to determine whether a debtor's homestead qualities for Florida's constitutional exemption from forced sale: 1) acreage limitations, 2) residency requirements, and 3) ownership requirements. Of course, to be eligible for protection from creditors, the property must be located in the State of Florida. (4) Furthermore, for policy reasons, homestead laws are applied liberally in favor of the homeowner.

Policy Behind the Homestead Exemption

Because the purpose of the unlimited exemption is to protect families from misfortune, the burden is on the creditor to argue against homestead protection. (5) In Public Health Trust v. Lopez, 531 So. 2d, 946, 948 (Fla. 1988), aff'g, 509 So. 2d 1286 (Fla. 3d DCA 1987), the court stated that the purpose of the homestead law is to promote the stability and welfare of the state by securing to the householder a home, so that the homeowner may live beyond the reach of financial misfortune. Similarly, in Orange Brevard Plumbing & Heating Co. v. La Croix, 137 So. 2d 201, 204 (Fla. 1962), the court said that the purpose of the homestead law "is to benefit the debtor by securing his or her homestead beyond all liability from forced sale under process of any court." Such cases reflect that courts apply the homestead exemption laws liberally so that families will have shelter and will not be reduced to absolute destitution.

Acreage Limitations

Whether the residence is within or without a municipality is of critical importance in determining the portion of the debtor's homestead that will be protected. As stated above, Florida's constitutional protection is generally limited to the extent of one-half acre if the residence is within a municipality. Until 1997 when the U.S. Supreme Court denied cert in the case In re Englander, 520 U.S. 1186 (1997), thereby letting stand the decision of the 11th Circuit Court of Appeals, (6) the extent to which homestead protection was available for a residence on more than one-half acre within a municipality was uncertain. (7)

The debtor in Englander owned a home on approximately one acre within a municipality, and the property could not be legally subdivided due to local zoning regulations. The debtor claimed a homestead exemption for a portion of the property that surrounded the nonexempt portion, eliminating any reasonable access to the nonexempt portion and rendering it valueless. The court, in reaching its conclusion that the homestead designation sought for a portion of the property was improper, stated that the debtor's "attempt at homestead exemption `gerrymandering' was clearly in bad faith." (8) The bankruptcy court granted the debtor an exemption in a portion of the proceeds to be derived from the sale of the property equal to the value of one-half acre. (9) The court of appeals reasoned that a sale and apportionment of the sales proceeds is an equitable solution that allows for the appropriate recognition of the debtor's homestead and affords creditors some satisfaction of their claims.

The 11th Circuit Court of Appeals reinforced Englander when given an opportunity with In re Kellogg, 197 F.3d 1116 (1999). There, the debtor, who owned a 1.3 acre oceanfront home in Palm Beach, argued his home should not be sold to pay creditors. Instead, the debtor reasoned, he should be able to remain in his residence and surrounding property to the extent of one-half acre; the remaining...