Business + Home = Homestead
Business – Home = Tough Luck
Until 1999, Texas allowed an exemption with the oxymoronic name of “business homestead.” As it went, if a debtor had two pieces of property, one he lived on and one he used for his business, both were considered homestead property if they came within the constitutionally mandated acreage limits as appropriate for rural or urban homesteads. (It can be reasoned that this exemption was designed to protect a craftsman or merchant who lived and worked on his property.) The business homestead exemption grew to include non-contiguous properties, also. Therefore, if Margaret lived in a house on Main Street and owned a beauty salon a block away, both the properties could be protected as long as they didn’t together exceed one acre. The same was true for rural property.
In 1999, legislation modified that expansive exemption. Since then, the urban homestead exemption has increased from one acre to ten acres, but if it is composed of more than one lot, the lots must now be contiguous. Margaret can no longer claim both lots as an exempt homestead. See Texas Property Code § 41.002. There is no provision in Texas law for a “homestead” exemption or any other real property exemption for non-residential property absent an associated (now adjacent) residential homestead.
Currently, the Texas Property Code § 41.002(a) permits a debtor to exempt property “for the purposes of an urban home or as both an urban home and a place to exercise a calling or business. . ..”
What happens when a debtor owns two contiguous lots, one used as a residence and one used for the debtor’s business, but surrenders or abandons the residential property? Does he retain a homestead interest in the business property? Not according to a new opinion in the Northern District of Texas.
Consider the case of Marshall Perry (In re Perry, Case No. 12-41595-DML-7 (NDTX)). At one time Mr. Perry lived on one urban lot and used an adjacent lot for his welding business. Because he could no longer afford the mortgage payments, he surrendered the residential lot to the lender and moved to another community. He retained the business property and continued to use it occasionally for business purposes and when he visited family nearby. When he did so, he would sleep on a sofa bed in the shop.
Mr. Perry claimed a homestead exemption on the business lot after filing Chapter 7 in the Fort Worth Division of the Northern District of Texas. Not surprisingly, the trustee objected to the exemption.
In a written opinion, Judge Lynn noted that under Texas’s generous homestead laws, a property owner may lose homestead rights only through death, abandonment or alienation, and he may abandon homestead rights on a portion of the property. After finding that Mr. Perry had abandoned his rights in the residential lot and had failed to show sufficient use of the business property as a “home,” the court reasoned that the business property lost its homestead exemption when it lost its homestead. The Chapter 7 Trustee was, therefore, entitled to liquidate the property.
Armstrong Kellett Bartholow P.C. represents debtors and trustees in exemption litigation. For more information, contact our attorneys at 214-696-9000.