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<title>Does Florida’s Homestead Exemption Apply to the Proceeds from the Sale of that Homestead?</title>
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<description><![CDATA[Does Florida’s Homestead Exemption Apply to the Proceeds from the Sale of that Homestead? The Florida Constitution provides a generous exemption for homestead property, i.e., a primary residence, which in most instances prevents the homeowners’ creditors from forcing the sale of the property in order to pay a debt. Fla. Const. Art. X, § 4. … <a href="https://gulisanolaw.com/does-floridas-homestead-exemption-apply-to-the-proceeds-from-the-sale-of-that-homestead/" class="more-link">Continue reading "Does Florida’s Homestead Exemption Apply to the Proceeds from the Sale of that Homestead?"</a>
The post <a href="https://gulisanolaw.com/does-floridas-homestead-exemption-apply-to-the-proceeds-from-the-sale-of-that-homestead/">Does Florida’s Homestead Exemption Apply to the Proceeds from the Sale of that Homestead?</a> appeared first on <a href="https://gulisanolaw.com">Gulisano Law, PLLC</a>.
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<h1>Does Florida’s Homestead Exemption Apply to the Proceeds from the Sale of that Homestead?</h1>
The Florida Constitution provides a generous exemption for homestead property, i.e., a primary residence, which in most instances prevents the homeowners’ creditors from forcing the sale of the property in order to pay a debt. Fla. Const. Art. X, § 4. This article addresses whether, and under what circumstances, Florida’s homestead exemption applies to the proceeds from the sale of the homestead when the owner decides to sell their property.
“In Florida, a person’s homestead is ‘exempt from forced sale under process of any court, and no judgment, decree or execution shall be a lien thereon,’ except for certain debts: ‘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.’” JBK Assocs. v. Sill Bros., 191 So. 3d 879, 880–81 (Fla. 2016) (quoting Art. X, § 4, Fla. Const.).
The Florida Supreme Court has consistently held that the homestead exemption “is to be liberally construed in favor of protecting the homestead.” JBK Assocs., 191 So. 3d at 881. Stated plainly, the three exceptions to the homestead protection in Florida apply in the following situations: (1) to the government when the taxes on the property are not paid; (2) to the lender that provided the loan that was used to purchase the property if not repaid; and (3) to the person or entity that the homeowner hires to perform work on the property if not paid.
As mentioned, this article addresses the applicability of Florida’s homestead exemption when the owner sells their property. Does the homestead protection apply to the proceeds received by the owner from the sale of their homestead? The Florida Supreme Court first addressed that issue in Orange Brevard Plumbing & Heating Co. v. La Croix, 137 So. 2d 201 (Fla. 1962) and—provided the former owner can meet the test discussed below—the Court held that the homestead exemption does apply to the proceeds. In 2016, the Court re-examined and affirmed that holding in <a href="https://casetext.com/case/jbk-assocs-inc-v-sill-bros-inc-5" target="_blank" rel="noopener">JBK Assocs. v. Sill Bros., 191 So. 3d 879 (Fla. 2016)</a>.
“Florida’s homestead exemption has been interpreted to provide protection not only for the physical homestead property, but also for both the cash and noncash proceeds from a voluntary sale of the homestead as well.” JBK Assocs., 191 So. 3d at 881 (citations omitted). “However, the following requirements must be met for sale proceeds to maintain the same protection from creditors as the original homestead: (1) there must be a good faith intention, prior to and at the time of the sale, to reinvest the proceeds in another homestead within a reasonable time; (2) the funds must not be commingled with other monies; (3) the proceeds must be kept separate and apart and held for the sole purpose of acquiring another home.” Id. (quotation omitted).
“Further, th[e] [Florida Supreme] Court has explained that ‘only so much of the proceeds of the sale as are intended to be reinvested in another homestead may be exempt ….’” JBK Assocs., 191 So. 3d at 881 (quotation omitted). “Any surplus over and above that amount shall be treated as general assets of the debtor.” Id. “Lastly, the ‘proceeds of the sale are not exempt if they are not reinvested in another homestead in a reasonable time or if they are held for the general purposes’ of the debtor.” Id. (quotation omitted).
In other words, under the Florida Supreme Court’s holdings, the protection afforded by the homestead exemption will apply to the proceeds from the sale of the homestead if the former owner has (1) a good faith intention, prior to and at the time of the sale, to reinvest the proceeds in another homestead within a reasonable time; (2) the funds from the sale are not commingled with other monies; and (3) the proceeds are kept separate and apart and held for the sole purpose of acquiring another home.
The purpose of the Florida Supreme Court’s holdings is to permit a homeowner a reasonable time to purchase a new home, and transfer the homestead status to it, after selling the prior homestead. See Kerzner v. Kerzner, 77 So. 3d 214, 216 (Fla. 3d DCA 2011) (“A protected homestead may be voluntarily sold, and the funds will be protected so long as they are not commingled and are held for the sole purpose of acquiring another home within a reasonable period of time.”); Rossano v. Britesmile, Inc., 919 So. 2d 551, 552 (Fla. 3d DCA 2005) (“We reverse … in light of the evidence concerning the judgment-debtor’s clear intention to devote all or part of the proceeds received from the sale of her previous home into a new homestead so as to qualify for continued exemption … it was error for the trial court to require garnishment of the entire amount claimed.”).
The first element of this test is fairly straightforward. At the time the homestead is sold, the former owner must have a good faith intention to use the proceeds from the sale to purchase a new homestead. Moreover, the new home must be purchased within a “reasonable time.” This is the usual situation. When someone sells their property, most often it is sold so that they can purchase another home. Further, the new home is usually purchased shortly after the prior homestead is sold.
Moreover, people usually intend to use the equity in the property (i.e. the proceeds from the sale) to pay at least some of the price for the new home with a mortgage covering the rest. In such case, there is no surplus after the new home is purchased. However, if is established that the seller intends to reinvest only a portion of the proceeds from the sale in a new home than any amount exceeding that portion would not be entitled to homestead protection.
Usually people sell their homestead with the intention of purchasing a larger, and therefore more expensive, home. However, sometimes people sell their homestead with the intention of downsizing. Things get slightly more complicated if the purchase price of the new home is less than the proceeds from the sale of the original homestead. For example, maybe empty nesters decide to move from a single family home to a smaller and less expensive condo. In such case, they may also intend to use the remaining proceeds from the sale of their prior homestead for living expenses.
In either event, if there is a surplus remaining from the proceeds of the sale of the homestead after purchasing the new home, the homestead exemption would not apply to that surplus. See Lane v. Cunniffe, 188 So. 3d 40, 42 (Fla. 4th DCA 2016) (“On remand, the court is directed to determine how much of the sale proceeds Lane intended, prior to and at the time of the sale, to reinvest in another homestead within a reasonable time and how much of the proceeds he has kept separate for that sole purpose.”). For example, assume after paying off the only mortgage on the property, the seller receives $250,000.00 from the sale of their homestead. If the seller than buys a new home, which only costs $200,000.00, there would be a surplus of $50,000.00 remaining from the sale of the original homestead. The homestead protection would not apply to the $50,000.00 surplus.
Further, if the property were sold with no intention of purchasing a new home then the homestead exemption would not apply any of the proceeds. This might be the case, for example, if a couple each owned their own homestead prior to marriage. After they are married, one spouse sells their property and moves into the homestead of the other spouse. In this situation, the homestead exemption would not apply to the proceeds received by the spouse from the sale.
The second and third elements of this test are essentially the same, the proceeds from the sale of the homestead must be kept apart and not “commingled” with any other money the former owner has. This would be accomplished, for example, by depositing the proceeds in a bank account created just for this purpose. Conversely, the proceeds might lose the protection of the homestead exemption if the proceeds were deposited in an existing bank account used for everyday purchases, thereby “commingling” those proceeds with other money, even if the former owner intends to use it to purchase a new home.
In order to avoid any potential issues, the best and safest course of action would be to open a new bank account and deposit the proceeds from the sale of the homestead, and only those proceeds, into it until the seller is ready to buy a new home. However, what if the seller does something else with the proceeds? In JBK Assocs., 191 So. 3d at 880, a homeowner sold his homestead and deposited the proceeds from the sale into a bank account titled “FL Homestead Account.”
Great start, however, the account was then split into three subaccounts. JBK Assocs., 191 So. 3d at 880. Collectively, the accounts contained the cash proceeds from the sale of the homestead, mutual funds, and unit investment trusts. Id. The latter investments were purchased by using some of the proceeds from the sale of the homestead. Id. A creditor of the homeowner, who had obtained a judgment against him, attempted to garnish those accounts. Id. In fighting the garnishment, the homeowner argued that the accounts were protected by the homestead exemption. Id.
The creditor argued that the homeowner lost the homestead protection when he purchased securities with a portion of the money. JBK Assocs., 191 So. 3d at 880. It is worth noting that the party objecting to the use of the homestead exemption has the burden of proof to establish the claimant is not entitled to it. Id. at 881 (quotation omitted). Importantly, the homeowner did in fact eventually use the money to purchase a new homestead within a reasonable period of time. Id. Nevertheless, the creditor appeared to have a pretty good argument since the homeowner arguably commingled the proceeds with other monies.
However, the trial court and appellate court ruled in favor of the homeowner, finding the homestead exemption still applied. JBK Assocs., 191 So. 3d at 880. The creditor then appealed to the Florida Supreme Court. Id. Ultimately, the Court affirmed the decisions of the lower courts, reasoning, “[i]n today’s economic climate, in which traditional bank accounts do not garner any significant amount of interest earnings, we do not believe placing the proceeds from the sale of a homestead in the type of safe investment account at issue here demonstrates an intent so different from reinvestment in a new homestead within a reasonable time as to violate [the test announced in] Orange Brevard.” Id.
As the Court further explained, “[a]ny decision contrary … would require judgment debtors to place homestead sale proceeds in non-interest-earning mediums only—perhaps an escrow account or even a jar under one’s bed—and we decline to read Florida’s homestead exemption provision so narrowly, especially given the liberal construction this area of Florida law typically enjoys.” JBK Assocs., 191 So. 3d at 881–82. Thus, non-cash proceeds of a sale of a homestead can be eligible for the homestead exemption, so long as they serve the same function that cash proceeds do, i.e., a temporary form of the homestead, to be converted back into a real property within a reasonable time.
Still, the homeowner in JBK Assocs. likely spent a significant amount in attorney fees <a href="https://gulisanolaw.com/practice-areas/civil-litigation/">litigating</a> the issue before prevailing in the Supreme Court. As such, the better practice, as mentioned above, is to deposit the proceeds from the sale of a homestead into a separate bank account with the title “FL Homestead Account” or something similar until a new home is purchased.
The post <a href="https://gulisanolaw.com/does-floridas-homestead-exemption-apply-to-the-proceeds-from-the-sale-of-that-homestead/">Does Florida’s Homestead Exemption Apply to the Proceeds from the Sale of that Homestead?</a> appeared first on <a href="https://gulisanolaw.com">Gulisano Law, PLLC</a>.
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