Mortgage Placed On Homestead Used Partially As Rental: Fraudulent Transfer Issues

Jon Alper Fraudulent Transfers

An attorney called with a question about whether placing a mortgage on a homestead property could be a fraudulent transfer when the owner rented part of the property to a third party tenant. The mortgage was made to the owner’s own attorney ostensible to secure legal fee obligation.

The homeowner owned a large property in the county on which he had built his primary residence and a separate building which he rented to third party tenants for income. He owned the property free and clear. My caller had filed a lawsuit against the homeowner on behalf of his client . In the face of a lawsuit, the homeowner gave his attorney a mortgage securing a $50,000 obligation.

Generally, mortgaging a homestead is not a fraudulent transfer because the homestead is an exempt asset. Yet, the issue here is whether the rental building is also covered by the homeowner’s exemption. The general rule is that an owner may use homestead property to generate income; the 160 acre size limitation for homesteads located in the county contemplated the owner conducting farming businesses which required substantial land area. Certainly, an owner that conducts a modern business- professional or technology related- at home does not jeopardize homestead status.

The examples of the family farmer or the current home business run out of a bedroom and garage involve a commercial use by the owner or his family. In the caller’s situation the commercial use was by an unrelated third party renter. In my opinion the homestead exemption is at risk when the commercial uses is by someone other than the owner.

If this example’s homeowner does not have homestead protection of his rental building, translated into some percentage of total homestead value, then giving a mortgage to the homeowner’s attorney during a lawsuit may partially be a fraudulent transfer. The amount of the mortgage multiplied by the non-exempt percentage of the property would be the target of a fraudulent conveyance allegation.

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