Florida Asset Protection : Asset Protection Law & Planning in Florida - Florida Homestead Exemption

Many people facing foreclosure are concerned about income tax liability from the lender's forgiveness of mortgage debt. If the mortgage lender does not pursue a deficiency judgment and writes-off the loan after foreclosure the lender could send the owner a IRS Form 1099 for imputed income for the amount of debt forgiven. In the case of a first mortgage, the debt forgiveness would be the difference between property value and mortgage loan balance; a second mortgage write-off creates an imputed income issue for the entire amount of the loan. There is no imputed income from debt forgiveness on your primary residence. Most imputed income issues are related to foreclosure or short-sales of investment property or second homes.

In response to a question from a Miami attorney I spoke with a local CPA concerning income tax treatment of debt forgiveness of investment real estate. The CPA is Lonnie Young usataxhelp.com. Mr. Young explained that imputed income after foreclosure and debt forgiveness often is offset by tax losses on the real estate investment. . Consider the example of a person who buys a house for $200,000 with a $180,000 mortgage. The house is lost to foreclosure when the value is $100,000. The lender sends the owner a 1099 for imputed income of $80,000 (mortgage balance less fair value). The foreclosure is a forced "sale" after which the owner has realized a tax loss of $100,000 ($200,000 purchase price less $100,000 value at foreclosure sale). The loss offsets imputed income so the taxpayer pays no additional tax.

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IRA funds are exempt from creditors in and out of bankruptcy pursuant to the exemption in Florida Statute 222.21(a)- except if your "IRA" is inherited, according to a recent decision by a Florida appellate court. The case considered a judgment creditor's claim against the debtor who had inherited  IRA funds from his deceased parent. The parent started the IRA and contributed pre-tax money during his lifetime. The court recognized that the parent's IRA was exempt from the parent's own creditors during the parent's lifetime. When the parent died, the debtor/son had the option under the tax law to withdraw all of his parent's IRA money over a five-yearperiod or  retain the money in what the IRS rules call an "inherited IRA." An inherited IRA is not subject to a five-year distribution rule, and it requires the debtor/son to take minimum distributions annually- the distributions could not be deferred.

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A client asked me two homestead questions which questions I have previously heard from other clients or email inquiries. This client owned a homestead with significant equity within a municipality. Homestead properties within a city up to ½ acre in lot size are protected under the Florida Constitution. The client said he intended to buy a ½ acre lot adjoining this existing homestead as an investment, and he wanted to know if the lot would be protected from creditors. My opinion is that the lot purchase would jeopardize the homestead protection of his existing house. Homestead includes the property upon which your residence is located as well as all contiguous land. If the client purchased the adjoining lot and took title in his own name the adjoining lot would be incorporated into his homestead and the size of his entire homestead would increase from ½ acre to a full acre. Thereafter, only 50% of the total homestead would be protected within the city limits. The client could not apportion protection to the original lot on which the house is situated. The purchase of the contiguous lot in his own name would forfeit protection of 50% of his house value. A better strategy would be to form a limited liability company and have the LLC purchase the adjoining lot. Because the client does not personally own the new lot it would not add to the size of his homestead. Land owned by entities, as opposed to natural persons, cannot be homestead property. The LLC would give some, although imperfect, asset protection.

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As previously mentioned on this Blog a new federal law protects tenants of foreclosed properties. The law requires the lender to honor the terms of bona fide leases after the lender takes back the property at foreclosure sale. At least one federal lender, "Freddie Mac" is offering to pay tenants to move out of properties after foreclosure. I received a letter from a law firm representing Freddie Mac addressed to the "unknown tenants" who leased and occupied a foreclosed house wherein Freddie Mac offered the tenants $4,000 cash to leave the property in 30 days. The proposed settlement required the tenants to deliver the property in broom clean condition. Freddie Mac offered to deliver a check payable to the occupants who sign the stipulation. Not only does the new tenant law protect tenants' lease occupancy rights after foreclosure, but the federal government mortgage agencies are now paying tenants to move into another dwelling.

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Tenants of single family homes had been facing sudden eviction when the homes they rented were sold to a mortgage lender at a foreclosure sale.  After the foreclosure sale the mortgage lender evicted the tenants even though the tenants' lease payments were current. To better protect tenants victimized by foreclosures against their landlords Congress passed a law which required the non-occupant purchasers at foreclosure sales (such as banks) to honor existing leases on the foreclosed property provided that the lease was bona fide and the tenants were not in default. Some "foreclosure defense" companies are using this new law to delay foreclosure law suits. These homeowners are creating bogus lease arrangements to prevent the lenders takeover of property and gain negotiating leverage for the homeowner.

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Suppose a husband and wife own personal property, a bank account for example, jointly with rights of survivorship in a state that does not recognize tenants by entireties ownership of personal property, and they intend to move to Florida. Florida recognizes tenants by entireties of personal property, and under Florida law all personal property owned by married couples with rights of survivorship is presumed to be entireties property. The question for this fact situation is whether the couples bank account in another state's bank becomes protected entireties property when the couple moves to Florida as permanent residents.

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Many of my clients are facing the prospect of lawsuits for personal liability on account of default on mortgages. Some of these clients have invested in many investment properties which are now upside down and unsustainable. During the real estate bubble many people inflated their income and assets on mortgage applications. My clients often ask me if the mortgage company will refer their case to the government for criminal prosecution because the clients had lied to their mortgage company in order to get financing. This week I received a call from a criminal defense attorney who was referring a client to me for asset protection advice. During our conversation I asked him if the mortgage companies or the government were prosecuting mortgage fraud related to the real estate bubble.

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