ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – DOES A HOMESTEAD EXEMPTION PROTECT YOUR HOMEOWNER’S EQUITY FROM AN EDD OR IRS LIEN?
By Robert S. Schriebman
A homestead exemption has a lot of history behind it. Historically, it protects a specific amount of equity in your home from the claims of creditors. It’s like a built-in nest egg historically recognized in the laws of most states including California. Black’s Law Dictionary defines the homestead exemption as follows:
“Laws passed in most of the states allowing a householder or head of a family to designate a house and land as his homestead, and exempting the same homestead from execution for general debts. Property tax exemptions (for all or part of the tax) are also available in some states for homestead property. Statutory requirements to establish a homestead may include a formal declaration to be recorded.”
The purpose of homestead laws is to extend creditor protection in the dwelling house, adjoining land, and family farm from being sold by civil creditors in a forced sale. As long as the family occupied the residence as their primary dwelling, they were allowed to retain a specific dollar amount of equity from the claims of creditors. This exemption was available regardless of whether or not the homeowner recorded a written “Declaration of Homestead.”
Homestead exemption rules are likely to come into play in personal bankruptcy situations under Chapters 7 and 13 of the Federal Bankruptcy Laws.
In California the rules are found in the Code of Civil Procedure § 704.710 et seq. The amounts vary depending upon whether one is single, married, or a senior citizen. A single homeowner gets an exemption of $75,000; the married exemption is $100,000. If you are 65 or older or have physical or mental disabilities, the exemption is $175,000.
Does a homestead exemption protect and insulate the equity in your home from an EDD or IRS tax lien? There are no cases in California dealing with the protection afforded by a homestead exemption from claims of California taxing agencies, such as the EDD. It seems clear, however, that these laws are designed to protect your equity from the claims of the usual civil creditors such as a judgment creditor, or an EDD lien. However, things are not so clear when it comes to protecting the equity in your home from the IRS.
In October 2018, a bankruptcy case out of the State of Washington held that a state homestead exemption does not stand against an IRS lien. See In re: William D. Selander, Jr., U.S. Bankruptcy Court, W.D. Washington, 2018-2 U.S.T.C. para 50,461 (Oct. 19, 2018).
Let’s take a look at the Selander case to see why the IRS was allowed to swallow up and disregard the homestead exemption.
The Selander Case
The Selander case involved a personal bankruptcy under Chapter 7. Selander owned a residence that was sold in a bankruptcy proceeding to pay the claims of creditors. After paying the bank on the secured mortgage, and other creditors, Selander had $125,000 of net equity. Under Washington homestead law, the exemption was exactly $125,000. However, the IRS was also owed money; much more than $125,000. The Trustee wanted to bypass the IRS and apply part of homestead exemption to pay the cost of the bankruptcy proceeding including his fees as Trustee. The IRS argued that it was entitled to all of the $125,000, and the Court agreed. As decided by the U.S. Supreme Court in Rodgers, the homestead exemption does not protect you from an IRS lien. See United States v. Rodgers [83-1 USTC para 9374], 461 U.S. 677, 701 (1983). In other words, the IRS can reach the equity in your home that other creditors cannot touch.
In Alsberg v. Robertson (In re Alsberg), 68 F.3d 312, 315 (9th Cir. 1995), the debtor’s homestead exemption removed the value of $125,000 from the bankruptcy estate but such exemption was powerless to eliminate the interest of the IRS in those funds claimed with the homestead exemption.
Why does an IRS lien trump a homestead exemption? As explained by the Supreme Court in Rodgers, the Supremacy Clause of the US Constitution renders state homestead exemptions ineffective against a federal tax lien.
Don’t be discouraged by either the Selander or Rodgers cases. Not everybody reading this article owes the IRS. A homestead exemption is important. If you are a homeowner, and occupy the property as your principle residence, you should record a homestead declaration. $75,000 – $175,000 is big money in your pocket. It belongs to you regardless of your credit rating or your battles with creditors.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the Federal and State governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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