Florida's unlimited homestead exemption does have some limits.

• Jurisdiction: United States
• Author: Nelson, Barry A.
• Date: 01 February 2003

Last month in Part I of this article, we discussed how recent commentators discussing high-profile corporate malfeasance and accounting scandals have sometimes inaccurately reported the effectiveness with which executives (and, by association, debtors in general) can use Florida's unlimited homestead exemption to avoid creditors' claims under existing law. We focused on the exemption provided by the Florida Constitution in Art. X, [section] 4 and its legislative implementation by the F.S. Ch. 222. We discussed the policy behind the homestead creditors' claim exemption, the types of residences that qualify as homestead, the size limitations of the real property on which the homestead is situated, and, finally, the manner in which a residence must be owned in order to qualify for homestead protection.

In Part II, we will discuss further state and federal law limitations on the homestead exemption, and proposed federal Bankruptcy legislation which, if enacted, would severely limit homestead protection for those debtors seeking to move to Florida to avoid creditors. We will also discuss planning issues for homestead and potential conflicts that can arise between the attorney, CPA, and financial planner when providing advice on homestead exempt planning.

Limitations on Florida's Homestead Exemption Imposed by Federal Law

In some cases, federal law will preempt Florida's homestead exemption. In 1998, the Bankruptcy Court held that a federal tax lien was enforceable against homestead property. (1) The court found that "the homestead exemption does not erect a barrier around a taxpayer's home sturdy enough to keep out the Commissioner of the Internal Revenue." (2) However, due to Congress' concern that seizure of a taxpayer's principal residence is particularly disruptive for the taxpayer and the taxpayer's family, a taxpayer's principal residence may be seized to satisfy a taxpayer's tax liability only as a last resort. Further, the taxpayer's residence is exempt from levy unless a judge or magistrate of a U.S. district court approves the levy in writing. See 26 U.S.C. [section] 6334(a)(13)(B) and (e) (2002).

The Supremacy Clause of the U.S. Constitution is another avenue available to federal courts when seeking to preempt state law. U.S. Const. Art. VI. Preemption is authorized if:

Congress expressly provides for preemption, if the area of law is one of comprehensive federal regulation that leaves no room for state laws to supplement, if the state law affects a field of dominant federal interest precluding state laws on the same subject, or if the state law and the federal law are in actual conflict so that compliance with both is physically impossible or the state law obstructs the accomplishment of the full objectives of Congress. (3)

Accordingly, the 11th Circuit held that a federal civil forfeiture statute preempts the Florida homestead exemption. (4) The court found that since the statute was designed to punish criminals while at the same time ensuring that innocent spouses are not penalized, "prohibiting forfeiture of all homestead property in [Florida] would clearly violate the congressional intent behind the forfeiture statute." (5) Note, however, that when a judgment is recorded prior to the debtor establishing homestead status, the residence is subject to levy. (6) This result should follow logically, since any property that is not homestead is subject to creditors claims and a recorded judgment should be respected if in place prior to the time a residence benefits from homestead status.

Questionable and Fraudulent Conveyances

Florida courts have stated in dicta that the homestead exemption should not be used as an instrument of fraud upon creditors. (7) However, when presented with an opportunity to so hold under circumstances smelling of fraud, the Florida Supreme Court refused to do so. In Havoco of America, Ltd. v. Hill, 790 So. 2d 1018 (Fla. 2001), judgment was entered against the debtor, a resident of Tennessee, on December 19, 1990. The enforceability of the judgment was delayed until January 2, 1991...