Rural Homestead Used Partially For The Debtor's Commercial Business
One of my asset protection clients owns two adjoining properties in the count. He built his residence on one property which is subject to a mortgage. The mortgage is upside down. He uses the adjoining property to operate a business. He is considering walking away from the home mortgage and letting the house go to foreclosure. He wants to know if a deficiency judgment would attach to the adjoining second property used commercially
Currently, both properties are protected from the client’s judgment creditors under the homestead exemption. First, both properties are part of his 160 acre homestead allowance. Homestead covers up to 160 of contiguous property. The second parcel is part of the homestead because it is contiguous even through it is otherwise identified for title and tax purposes as a distinct parcel.
Debtor’s may use part of their homestead for commercial purposes if the homestead is situated in the county rather than in a municipality. The 160 acre homestead allowance contemplates that debtors located outside of cities may often use part of their land to make a living from ventures such as farming activities which require large land area. Homestead protection is designed to protect the debtor’s family. The large acreage allowance provides the debtor’s family not only a roof but also the land necessary to support the family financially. Commercial use is contemplated, not prohibited for rural homesteads.
If the debtor leases the second property to a third party who then uses the property for a similar business there debtor would lose homestead protection. There is a difference between the debtor conducting his own business, on one hand, and on the other, leasing the property for income.
If this client loses his house at foreclosure I think he will also lose homestead protection for the adjoining lot used for his family business. The second lot is protected because and so long as it is adjacent to the debtor’s primary residence. After a foreclosure the debtor will be forced to live somewhere else. The second lot will no longer be next to the debtor’s actual residence and no longer under the homestead umbrella.
The debtor should probably convey title to the second lot to another entity prior to the foreclosure while the lot is still an exempt homestead asset. A conveyance of an exempt asset cannot be reversed as a fraudulent transfer.
