Chapter 41 of the Texas Property Code deals with homestead exemptions.
Section 41.001(b) of the Texas Property Code provides that a homestead is subject to a foreclosure or execution sale by creditors only for the following types of debts:
(1) purchase money;
(2) taxes on the property;
(3) work and material used in constructing improvements on the property if contracted for in writing as provided by Sections 53.254(a), (b), and (c);
(4) an owelty of partition imposed against the entirety of the property by a court order or by a written agreement of the parties to the partition, including a debt of one spouse in favor of the other spouse resulting from a division or an award of a family homestead in a divorce proceeding;
(5) the refinance of a lien against a homestead, including a federal tax lien resulting from the tax debt of both spouses, if the homestead is a family homestead, or from the tax debt of the owner;
(6) an extension of credit that meets the requirements of Section 50(a)(6), Article XVI, Texas Constitution; and
(7) a reverse mortgage that meets the requirements of Sections 50(k)-(p), Article XVI, Texas Constitution.
For example, a person’s home will be protected even though he defaults on credit card debts, car loans, tort liability, student loans and many other types of debts.
In addition, the surviving spouse and minor children of the decedent are entitled to have the homestead set aside for their exclusive use and benefit, rent-free, for the duration of their lives. It doesn’t matter in whose name the property is titled as long as it is part of the decedent’s estate. In addition, it doesn’t matter whether the decedent’s will or the laws of intestacy leave the home to somebody else. (For more on the rights of survivors of decedents, see this article.)
Urban vs. Rural Homesteads
Section 41.002 defines the amount of property which qualifies either as an urban or rural homestead. It states:
Sec. 41.002. DEFINITION OF HOMESTEAD. (a) If used for the purposes of an urban home or as both an urban home and a place to exercise a calling or business, the homestead of a family or a single, adult person, not otherwise entitled to a homestead, shall consist of not more than 10 acres of land which may be in one or more contiguous lots, together with any improvements thereon.
(b) If used for the purposes of a rural home, the homestead shall consist of:
(1) for a family, not more than 200 acres, which may be in one or more parcels, with the improvements thereon; or
(2) for a single, adult person, not otherwise entitled to a homestead, not more than 100 acres, which may be in one or more parcels, with the improvements thereon.
(c) A homestead is considered to be urban if, at the time the designation is made, the property is:
(1) located within the limits of a municipality or its extraterritorial jurisdiction or a platted subdivision; and
(2) served by police protection, paid or volunteer fire protection, and at least three of the following services provided by a municipality or under contract to a municipality:
(A) electric;
(B) natural gas;
(C) sewer;
(D) storm sewer; and
(E) water.
Notice that as long as the property meets the definition of a homestead, it is exempt, no matter what its value is and no matter how much equity is in it.
Unimproved Property
Unimproved property can qualify as homestead in many circumstances. The most important factor is the intent of the owner to use the property as a homestead as manifested by his objective conduct. For example, if the owner has entered into a contract to build a home on the property which he intends to live in, the property will typically qualify. Intent is a fact-driven question and can be shown in many different circumstances. In rural cases, unimproved property can qualify as part of a homestead even if the owner never intends to live there. This is discussed below.
Multiple Tracts
While an urban homestead can consist of multiple tracts as long as they are contiguous, a rural homestead can consist of non-contiguous tracts – even when they are miles apart. A common situation is where a rural resident has separate acreage nearby which he uses to graze livestock, raise crops or engage in some similar use “for purposes of a rural home.”
There is case law holding that a family business, such as an auto body shop, qualifies as property used “for purposes of a rural home.” There is also case law holding that developing a rural tract into rental properties does not qualify when the owner does not live on the property. However, temporarily renting all or part of a homestead will not result in loss of its protections.
It is important to be very careful when changing the use of, or leasing, all or even a part of the homestead property. An attorney should be consulted to make sure the new use or lease will not be deemed “abandonment” of the homestead.
Abandonment
When a homestead is abandoned, it no longer maintains its exempt status. A classic example is when the owner keeps his existing home as a rental property and moves into a new home. The new home will qualify as a homestead, but the rental home no longer does. Abandonment can occur in a variety of ways. However, for married persons, a spouse cannot abandon the homestead without the consent of the other spouse. This rule is important in the context of separation and divorce.
Proceeds of Sale
Section 41.001(c) of the Property Code provides a window of opportunity for owners to sell their homes and reinvest the proceeds into a new home. The proceeds are exempt for 6 months from the date the home is sold.
Be Careful when Putting Homesteads into Trusts
It is a somewhat common estate planning practice to put one’s homestead in a trust – either in an inter vivos trust (made during life) or in a testamentary trust (a trust created in a person’s will). Caution should be exercised when putting homes into trusts. Unless the trust is a “qualifying trust,” the owner can lose the valuable property tax homestead exemption and worse, he can lose the homestead to general creditors. (You can read more about “qualifying trusts” in this article.)
Don’t Lose Your Step-Up in Basis
There is a huge difference between gifting property, including your homestead, during your life versus holding onto it until death. (Read more about it here.)
Homestead laws are varied and complex. It is always a good thing to know your rights so you can plan appropriately.