1215-day rule: Is Residency Needed, or Merely Ownership in California?

A look at how closing the Mansion Loophole could lose your home in bankruptcy

Does the 1215-day rule for the homestead require occupancy as a domicile, or merely ownership? This is a new issue here for bankruptcy attorneys in California. It matters to you, too, if you own a home in California and are thinking of filing bankruptcy. This is because the homestead exemption amount until 1/2021 was always below the 522 number.  Let’s break this apart in plain English a little bit so we can understand what’s at stake.

New California Homestead Exemption and the Mansion Loophole

Homestead Increased in California

As you may have heard, the California homestead exemption increased recently.  For years, it protected a maximum of $100,000 in home equity for a typical married couple. Suddenly in 2021, the California homestead was increased to a minimum of $300,000, and probably more than that where you live.

Great news, right? But there’s a catch. Well a few catches. But let’s focus on just one: the mansion loophole.

The Mansion Loophole, Federal Exemptions, and 522(p)

What is the Mansion Loophole?

What is the mansion loophole, you ask? It’s the kind of concept that allowed OJ Simpson to go buy a big fancy house in Florida and then move to that state and immediately exempt tons of equity in that home so that his creditors couldn’t get their hands on it.

Congress decided that’s not fair to parachute in and just take advantage of a state’s generous exemptions. Or for scoundrels such as Enron executives like Kenneth Lay to shield millions in equity after harming so many people. To benefit from a state’s laws and protections, Congress said you need to acquire the property for a period beforehand, and not merely a domicile.

The Federal Exemptions, 1215 days, and 522(p)

Federal exemptions are bankruptcy protections available in some states, and fallback numbers for other states. They are figures published and updated by the federal government. The federal exemptions increase periodically. The 1215-day number used in here is valid for 2022, but may adjust in the future.

Which brings us to 11 USC 522(p).

to exempt property under State or local law, a debtor may not exempt any amount of interest that was acquired by the debtor during the 1215-day period preceding the date of the filing of the petition that exceeds in the aggregate $125,000 in value in—
(A) real or personal property that the debtor or a dependent of the debtor uses as a residence;
(B) a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence;
(C) a burial plot for the debtor or a dependent of the debtor; or
(D) real or personal property that the debtor or dependent of the debtor claims as a homestead.

The gist of all that is that you need to have acquired an interest in the property over 1215 days prior to claiming the homestead exemption for it.  OJ would now need to wait over three years after acquiring the property before his assets would be safe from creditors.  Mansion loophole closed.

Why this matters

“Great,” you say, “but what does this have to do with me?”

This means that if you file bankruptcy and you have a house, you don’t get the gargantuan California homestead exemption of a minimum of $300,000 if you acquired the interest in the last three years. You lose it, and “only” get the federal homestead exemption of $189,050.

Maybe that’s enough. Maybe you lose your home in bankruptcy. The 1215 days matter to debtors in California. It can make the difference between keeping your house in Chapter 7 bankruptcy, or losing it.

They never used to matter. Why? Because before 2021, we could never “lose” the exemption down to $189,050. This is because we were already capped at $100,000. The 522 limitations were never a factor in California. Until now. Suddenly, a $600,000 homestead can be slashed to less than a third. It matters that all of 11 USC 522 is paid attention to very closely now for California bankruptcy lawyers.

But wait, there’s more.

1215 days: Ownership or Residency?

The issue

Do you have to live in the place for 1215 days, or just own it? Let’s say you have a rental property in Santa Barbara which you acquired and have owned for over four years. It’s had renters living in it while you live elsewhere, and you’ve had title all that time. Then a month before you file bankruptcy, the renters leave and you move in.  You live there a month, but have owned it for over 1215 days. Do you get the big massive California homestead exemption, or the shrimpy 522(p) reduction?

It’s not as clear as you might think.

Looking back at 11 USC 522(p), the words “amount” and “interest” and “acquire” are not defined in the Bankruptcy Code. So, like most things in life, it’s settled in court.

The Ninth Circuit ruling on the 1215-day rule

The Greene Case Looks Like a Win

The issue was looked at by the Ninth Circuit Court of Appeals in 2009 (in the context of Nevada state law and its exemption). There, the 9th Circuit ruled:

We hold that “any amount of interest that was acquired,” as used in Section 522(p)(1), means the acquisition of ownership of real property and that the monetary cap in Section 522(p) does not apply to property to which a debtor acquired title more than 1215 days before she or he filed a bankruptcy petition. That language does not include a homestead claim for the underlying property interest, which claim was recorded within the 1215-day period.

In re Greene, 583 F.3d. 614, 624 (9th Cir, 2009).

Boiling all that legal jargon down, the Ninth Circuit is saying that the smaller cap of 522(p) doesn’t apply if the acquisition of ownership of the property was more than 1215 days ago. The 9th Circuit Court of Appeals ruled that it can’t limit a homestead property interest that started in the 1215-days period.

Or more simply, the court in Greene said that as long as ownership is more than 1215 days, the shorter homestead doesn’t matter. But remember, it was ruling on Nevada law and its exemptions.

But The State Law Must be Interpreted

Before we celebrate here in California, note that there’s a way this may not be applied here.  In other words, state law must be looked at, and each state has its own meaning and reasoning for its homestead exemptions. Is it intended to create a property interest?  Or is it just privileges?

The 9th Circuit reached the Greene ruling after a review of state law (both Nevada and Texas) regarding the purpose of the exemption, and concluded that Nevada exemption law created a property interest, and not merely exemptions and privileges. (Id. at 621-622, citing the review of Texas in In re Rogers, 513 F.3d. 212, 225 (5th Cir, 2008).

But What About California’s Homestead Exemption: Privilege or Property Right?

In California, remember, this is all new because the 1215-day cap of 522p never mattered before 2021.  The 9th Circuit has not ruled on this recently, that I’m aware of, in the context of California’s homestead exemption.

However, a long time ago, when Pat Brown was governor, it did rule on the issue, in a case which would distinguish it from Greene and Rogers.  The Ninth Circuit Court of Appeals ruled that California’s homestead laws do not create property rights, but merely exemptions.

“…the California state courts have repeatedly held that the filing of a homestead declaration in that state creates merely a privilege or exemption attached to but not otherwise affecting title.”

Shaw v United States, 331 F.2d. 493, 497 (9th Cir, 1964).

That would distinguish it from the good news of the Greene case, and means that you have to live there for the 1215 days to get the California homestead exemption, even if you owned it for over four years.

In closing

Best I can tell, Shaw is still good law, at least until someone tests it in the years to come. This means the safe bet is residency is required for 1215 days at the property to “acquire” it, and not merely ownership.

Perhaps with the new broadening of the homestead exemption in 2021 and the importance it underscores, the 9th Circuit may now reach a different conclusion, but it’s not something I’d knowingly bet a client’s house on.