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Florida’s Unlimited Homestead Exemption Does Have Some Limits, Part II


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, §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. §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. With full knowledge of the judgment, the debtor purchased a Florida home on December 30, 1990, using nonexempt funds that would have been available to the known creditor, intentionally converting them into Florida homestead property. The Florida Supreme Court reasoned that when an equitable lien is sought against homestead real property, there must be proof of some fraudulent or otherwise egregious act by the beneficiary of the homestead protection, and the creditor did not provide such proof.8 The court also noted that the debtor’s conversion of funds to avoid a creditor was not one of the three exceptions to the homestead exemption under the Florida Constitution and, therefore, refused to extend equitable principles to permit the creditor to proceed against the debtor’s homestead.9

The three circumstances set forth in the Florida Constitution under which a forced sale of a homestead may take place, as cited in Havoco, are 1) payment of taxes and assessments thereon; 2) obligations contracted for the purchase, improvement, or repair thereon; or 3) obligations contracted for house, field, or other labor performed on the property.10 While none of these situations were present in Havoco, the court refused to provide equitable relief for the creditors in a situation that appears to have been ideally suited for it.

A potential danger of situations in which there is egregious conduct, however, is the possibility that if the matter is in bankruptcy court, the bankruptcy court judge may choose to withhold, discharge, or dismiss the bankruptcy altogether, thereby permitting creditors to survive bankruptcy.11 While this potential danger is an example of equitable relief a judge may choose to provide, it is something debtors must be aware of.

Proposed Federal Bankruptcy Legislation

To curb the perceived abuses of the homestead exemption in Florida and other states, Congress has been considering ways to overhaul the nation’s bankruptcy laws since 1997. In 2001, separate bankruptcy reform bills were passed by the Senate and House that, if enacted, would have an enormous impact on the value of a homestead that may escape a bankruptcy. There was much debate and conflict between the House and Senate versions, with one key area of dispute being the unlimited homestead exemption permitted by several states including Florida and Texas. In April 2002, with the threat of a veto from President Bush should Congress attempt to cap state homestead exemptions, the two sides came together and worked through several competing matters.12

The House bill, H.R. 333, continued to permit an unlimited homestead exemption. However, it limited the exemption to debtors who had owned their homes for at least two years prior to filing for protection under federal bankruptcy laws. The House bill also included three safeguards to protect against perceived abuses: 1) the exemption would not protect assets that were converted into homestead property if the conversion occurred within seven years prior to filing, and if the court determined that the conversion was done to hinder, delay, or defraud creditors; 2) the debtor must have lived in the state of the claimed homestead benefit for 730 days prior to filing for protection (otherwise the law of the prior domicile would generally apply); and 3) if the unlimited exemption was not permitted, the exemption would be capped at $100,000.

The Senate bill, S.420, was much less generous to debtors. It required that they live in the state of the claimed homestead benefit for 730 days prior to filing for protection in order to receive a maximum $125,000 homestead exemption. If the debtor failed to meet the residency requirement, the homestead exemption of the prior domicile would control. The proposed Senate bill did not permit an unlimited homestead exemption.

Members of the conference committee met on May 22, 2002, but failed to report the bill out of committee because of a deadlock over a matter unrelated to homestead bankruptcy problems.13 The compromise bill, if enacted, would have significantly impacted the ability of a person to move to Florida shortly before a bankruptcy filing (or any other state with favorable homestead provisions) to take advantage of its unlimited homestead exemption. The compromise version of H.R. 333 is dead. However, had it been enacted, it would have impacted the exemption by capping the homestead exemption at $125,000, only if the debtor: 1) could not meet a residency requirement of 40 months in a particular state before filing for bankruptcy; 2) was shown to have committed fraud or other criminal acts, such as violations of state or federal securities regulations, prior to filing for bankruptcy (this provision appears to be aimed at situations such as Enron and WorldCom); or 3) was subject to pending criminal charges. Furthermore, the unlimited homestead exemption would still apply in Florida if the other requirements to qualify for homestead were satisfied. The bankruptcy court would have had the ability to look back 10 years for instances of fraud associated with a homestead exemption claim.14 Much has been written on whether the compromise bankruptcy bill was fair even though it retains the unlimited homestead exemption.15 It would appear that any future bankruptcy reform will have as one of its aims the elimination of some of the eve-of-bankruptcy maneuvering that allowed debtors similar to those in the Havoco decision to use Florida’s homestead as a successful technique to exempt significant assets from the reach of the bankruptcy court.

It should be noted that the compromised bill after being approved by the Senate was defeated in the House by religious conservatives on November 14, 2002. As a result, the House introduced H.R. 5745, an amendment to H.R. 333, which removes §330 from the compromised House bill. Section 330 was the controversial provision which prohibited abortion activists from discharging their debts incurred in connection with protest activities. The Senate did not consider the new version of the bill and it has been reported that the Senate will no longer act on bankruptcy reform in 2002. In light of the extended negotiations that took place to arrive at the compromise 2002 bankruptcy bill described above, it would appear likely that there will be reform in the future. However, based upon the latest string of criminal indictments of corporate executives, it is possible that legislators may be unwilling to accept a continued unlimited homestead exemption, and advisors must be aware of such a possibility.


Once a residence satisfies all of the requirements for homestead creditor protection described in this article, other planning issues remain. For example, deciding on the amount of equity to maintain in a residence can be a very difficult decision. From an asset protection viewpoint, a homestead owned free and clear provides the greatest protection to a homeowner because his or her protected equity in the home is equal to its fair market value. However, many financial planners and CPAs maintain that having too much equity in a homestead is wasteful because the owner does not benefit from a mortgage interest deduction and because the funds used to pay off the debt may do better if invested elsewhere. These issues may create conflicts among a client’s team of professionals. If asset protection is a significant client objective, we have recommended the benefits of having the smallest affordable mortgage and maintaining the highest equity possible in the homestead. However, on occasion, the client’s financial planner and/or CPA criticize such planning and advise the client that he or she could benefit from investments that would generate earnings that would exceed the after-tax mortgage interest cost. The authors have been involved in a situation where a client’s financial advisor was incensed because a mutual client withdrew funds from his account with the financial planner to pay down a portion of his mortgage, thereby enhancing his homestead equity.

It is important for the client to make an informed decision on whether to maintain a mortgage on his or her residence if asset protection is an important goal. The tax, financial, and asset protection consequences of each alternative need to be considered. Since the homestead exemption protects the equity in a homestead, the greater the equity in the homestead, the greater the value that will be protected.

While there are many other asset protection techniques effective in Florida, such as annuities, qualified pension plans, IRAs, cash surrender value of life insurance policies, and wage earner accounts, it is the authors’ opinion that the best asset protection planning is a diversified approach considering the exemptions of all such options.16 Furthermore, family limited partnerships, spendthrift trust planning, and domestic and foreign asset protection trusts should be considered to develop a comprehensive asset protection plan. However, the benefits of each such option must be compared with the peace of mind that comes with knowing one’s home is protected from creditors. Consequently, for those who are particularly motivated by asset protection planning, the guiding light may be to ensure that their homesteads satisfy all of the homestead requirements described in this article, and that they maintain as much equity as possible in the homestead.


While it may appear that the Florida homestead exemption is unlimited, there are significant restrictions that are not commonly understood by the press and public. A Florida debtor assumes at his or her peril that his or her homestead is exempt in its entirety from a forced sale for the benefit of creditors.

Before a debtor can be confident that the homestead will survive attack by creditors, he or she must be sure that the residence satisfies applicable acreage requirements, be recognized as a homestead, and be titled properly. Even if the homestead appears to meet all Florida state law requirements, the U.S. government may, under certain circumstances, pierce the protective armor of homestead protection. In addition, egregious or fraudulent conduct intended to hamstring claims of legitimate creditors could invite a court to do what courts have come close to doing on several prior occasions: carve out an equitable exception to homestead protection. Moreover, if a bankruptcy bill is enacted in the coming months, it will certainly resemble the proposed 2002 bankruptcy bill. Thus, the debtor cannot have engaged in certain types of egregious conduct prior to having filed for bankruptcy, and must satisfy a stringent residency requirement prior to filing for bankruptcy. Finally, a client’s legal advisor must be sensitive to the possibility that the client’s other advisors may recommend a course of action that is inconsistent with prudent asset protection planning.

1 In re McFadyen , 216 B.R. 1006, 1008 (Bankr. M.D. Fla. 1998).

2 Id. at 1009, quoting Thompson v. Adams , 685 F. Supp. 842, 846 (M.D. Fla. 1988) quoting U.S. v. Estes , 450 F.2d 62, 65 (5th Cir. 1971).

3 United States v. One Single Family Residence Located at 212 Airport Rd. South, et al., 771 F. Supp. 1214, 1215 (S.D. Fla. 1991), quoting 894 F.2d 1517 (11th Cir. 1990).

4 United States v. One Single Family Residence Without Buildings, et al., 894 F.2d 1517 (11th Cir. 1990).

5 Id. at 1216.

6 Kirkland v. Kirkland , 253 So. 2d 728, 730 (Fla. 3d D.C.A. 1971); Aetna Ins. Co. v. LaGasse , 223 So. 2d 727, 728 (Fla. 1969); Carrington, 214 F. Supp.2d 1348 citing Bessemer v. Gersten , 381 So. 2d 1344, 1347 n.1 (Fla. 1980).

7 Simpson v. Simpson, 123 So. 2d 289, 294 (Fla. 2d D.C.A. 1960); Frase v. Branch , 362 So. 2d 317, 319 (Fla. 2d D.C.A. 1978) (“Great care should be taken to prevent homestead laws from becoming instruments of fraud, an imposition on creditors, or a means to escape honest debts.”); Englander , 95 F.3d at 1031 (“The homestead exemption law is intended to be a shield, not a sword, and should not be applied as to make it an instrument of fraud or as an imposition upon creditors”).

8 Havoco , 790 So. 2d at 1027.

9 Id. at 1028.

10 Id . at 1022.

11 Havoco , 197 F.3d 1135, 1143 n.12. (“Adding to the confusion in this area is the conclusion of some courts that, although a debtor s fraudulent conversion of non-exempt assets into a homestead does not provide a basis for denying him the homestead exemption, the debtor’s fraudulent transfer may serve as the predicate for denying the discharge. See, e.g., Marine Midland Bank, N.A. v. Mellon, 160 B.R. 860 (Bankr. M.D. Fla. 1993) (denying discharge under 11 U.S.C. §727(a)(2)(A) when the ‘debtor who clearly by law is entitled to convert nonexempt assets to exempt assets did so in this case with a fraudulent intent’); In re Hendricks, 237 B.R. 821, 826 (Bankr. M.D. Fla. 1999); In re Young, 235 B.R. 666, 671 (Bankr. M.D. Fla. 1999)).”

12 Bankr. L. Daily (BNA) (May 31, 2002).

13 Id.; Greg Hitt and Christine Whelan, Bankruptcy-Reform Bill Displays Still-Formidable Corporate Clout , The Wall Street Journal Online , July 29, 2002.

14 Bankr. L. Daily (BNA) (April 24, 2002).

15 Dawn Kopecki, Deal Paves Way for New Bankruptcy Law; House Vote Seen Friday , The Wall Street Journal Online , July 26, 2002; Dawn Kopecki, US House Expected to Adopt Harsh New Bankruptcy Laws , The Wall Street Journal Online , July 26, 2002; Kathleen Day, Hill Set to Toughen Bankruptcy Law , The Washington Post , July 26, 2002; Bankruptcy reform bill moves forward , USA Today , July 26, 2002; Rob Wells, Passage of Bankruptcy Bill Now Trickier for US Congress , The Wall Street Journal Online , July 29, 2002; US House Adjourns Without Acting on Bankruptcy Bill , The Wall Street Journal Online , July 29, 2002; and Philip Shenon, Vote on Bankruptcy Bill is Stalled by Abortion Provision , The New York Times , July 30, 2002.

16 See Fla. Stat. Ann . §222.13 222.25 (2002).