California Homestead: Intent to Reside and the Out-of-State Home

A bankruptcy attorney colleague recently asked, does the California homestead exemption protect you if you don’t reside in the house?  Are you required to live in the home? For how long? Who qualifies? Does the homestead exemption protect the home if the house isn’t in California? The answer, like most things in law, is: “it depends.”

Dual residency in two states and and claim homestead in both?

No, there is no dual residency in multiple states for the purposes of homestead. As you’ll read below, a homestead is the place in which you primarily live. You can’t primarily live in two places. So, the determination is where you primarily reside, which state law applies, and is the house protected by the California homestead exemption.

Let’s look at these “away from home” situations one at a time.

The California homestead and intent to reside

First, can someone claim the California homestead exemption if they live in the house on the date the petition is filed, but move out after? What if they move out after the Chapter 7 bankruptcy is filed, but it’s just a temporary relocation?  Or what if the debtor who filed bankruptcy really has no intention to return?

The result is very fact-specific, and has had bankruptcy courts and appellate courts carefully examining the particulars for the debtor before filed, on the date the case was filed, and then after the case was filed. Let’s review a few significant cases in the Ninth Circuit to see how the courts have ruled.

Not residing in the house on date of filing

First, let’s look at the case of Andy Diaz. He owned and lived at a home in Orange County, Calif.  He then suffered two brain aneurysms. Those required many surgeries, and left Mr. Diaz in a coma. After weeks, he awoke from the coma, but couldn’t walk or speak, and the symptoms were similar to a stroke.

Mr. Diaz got better, and to rehabilitate, moved into his mother’s house, which was across the street from his own home, six houses down.  Diaz then filed bankruptcy, claiming the homestead exemption in his home where he wasn’t living.

The Chapter 7 trustee challenged, and won in bankruptcy court. Diaz appealed. Nobody disputed that the debtor didn’t live in the house when the bankruptcy was filed.

The 9th Circuit Bankruptcy Appellate Panel (BAP) ruled that, “California courts have long held that a lack of physical occupancy does not preclude a party from establishing actual residency and claiming the homestead, if the claimant intends to return.” In re Diaz, 547 BR 329, 335 (9th Cir BAP, 2016). It went on: “Physical occupancy on the petition date is therefore neither a necessary nor sufficient condition of residency.” Id. at 336.

Residing in the home at filing, but intent to move

Next, let’s look at the case of Kevin Gilman. He did live in his house on the date of filing. Residency established, slam dunk on the homestead exemption, right? Not so fast.

It turns out that Mr. Gilman also had his home in escrow at the time of filing. Creditor challenged. The bankruptcy court agreed with the debtor. The creditor appealed.

The appellate court found that, unlike Diaz, it was undisputed that Mr. Gilman had occupancy of the premises, and was a continuous resident of the property.

However, it also ruled: “To determine whether a debtor resides in a property for homestead purposes, courts consider the debtor’s physical occupancy of the property and the intent to reside there.” In re Gilman, 887 F.3d 956, 965 (9th Cir, 2018).

It then cited the case of Mr. Diaz when it wrote: “Physical occupancy on the filing date without the requisite intent to live there, is not sufficient to establish residency.” Gilman at 966, citing Diaz at 336.

After all that, the bottom line after Gilman to successfully claim a California homestead exemption is that, among other things, regardless of where the debtor lives on the date the bankruptcy petition is filed, there has to be evidence to show that the debtor intends to live at the residence.

Intent to reside but only equitable interest

What if the person filing bankruptcy claiming the homestead exemption in California doesn’t even have title to the house? That brings up the case of Steve Nolan. There, Mr. Nolan claimed an exemption for a property in Corona, California. Like Gilman, he lived at the property, and intended to continue living there. Unlike Gilman or Diaz, he didn’t have legal title to the house.

Instead, he was both trustee and partial beneficiary of a trust, which held title to the property. The bankruptcy court ruled that Mr. Nolan did not have an interest in the property subject to an enforcement lien and not even bare legal title.

However, because he was 50% beneficiary of the trust, that portion is property of the estate per 11 USC 541(a)(1) and (c)(2). The Court then reviewed applicable case law that allows homesteading based on an equitable interest, and ruled in debtor’s favor. In re Nolan, 618 BR 860 (Bankr Ct CDCA 2020).

The California homestead exemption for the out-of-state house

Occupancy, future intent, but home outside California

Next, we ask if someone claim a California homestead exemption if the California debtor lives in the house, intends to reside there so it’s his residence and domicile, but the house isn’t in California?  The Ninth Circuit Court of Appeals considered this and ruled: yes.

This is the case of Robert Arrol. He bought a house in Michigan. Then, without selling that home, he moved to California for two years. He then moved back to his Michigan house, and within 90 days of moving, he chose the venue to file bankruptcy in California.

He used California’s homestead exemption to protect his Michigan residence.  You guessed it: the bankruptcy trustee objected to the homestead exemption. The bankruptcy court ruled in favor of Mr. Arrol, and the trustee appealed, and lost again. The trustee appealed yet again, this time to the Ninth Circuit.

The Ninth Circuit’s ruling on an out-of-state California homestead

The appellate court examined 11 USC 522(b)(2)(A), which pointed to state exemption law. Given that Mr. Arrol lived in California for the greater part of 180 days before filing, California law applied. Looking at CCP 704.730 and 704.710(c),  the appellate court determined whether the state law allowed this.  The Ninth Circuit found that California state law didn’t limit the homestead exemption to dwellings in California, and concluded,

We find nothing in the California exemption statutory scheme, its legislative history, or its interpretation in California case law to limit the application of the homestead exemption to dwellings within California.

In re Arrol, 170 F3d 934, 937 (9th Cir, 1999).

California homestead exemption for out-of-state property with no intent

Mike Showalter owned an interest in a Florida house. He had lived at the Florida property for some time over decades.  For the twelve years prior to filing bankruptcy, he lived in California in a rental property. After filing bankruptcy, he moved to a different rental property in California.  A month before filing bankruptcy, while living in California, he signed a declaration that the Florida house is his principal dwelling, and it’s his homestead.

The appellate court determined that the declaration was “patently untrue” and by Mr Showalter’s own testimony, he hadn’t lived at the Florida property for about twenty years, he didn’t live in Florida, and no credible intention to return to live at the Florida property, and the claim of California homestead is invalid.  In re Showalter, (12-22720, 9th Cir BAP, 2013).

Residency and the California Homestead: Piecing it all together

As of this writing, it seems the current law on the California homestead exemption for a home where you maybe don’t live which may be in a different state is the following. You can claim the California homestead exemption if it’s your residence, California law applies, and you intend to live in that residence as your future home, even if it’s not in California.