FLORIDA'S UNLIMITED HOMESTEAD
EXEMPTION DOES HAVE SOME LIMITS
Barry A. Nelson, Esq.
Kevin E. Packman, Esq.
This article was published in
the January & February 2003 issues of The Florida Bar Journal and can also
be viewed at the Florida Bar Web Site.
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. 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, 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. 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 Article X §4 and its legislative implementation by the Florida Statutes
chapter 222. It will not discuss Florida’s homestead exemption for
purposes of ad valorem taxation, which is found in the Florida Statutes
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.
The following notice
is required by the IRS: Any U.S. federal tax advice contained in
the articles and information in this web site is not intended to
be written or used, and cannot be used or relied upon, to avoid
tax-related penalties under the Internal Revenue Code, or to
promote, market or recommend to another any tax-related matter