Laws that impact home ownership are often not well understood. Many homeowners may not be aware of an exemption that slightly lowers annual property taxes or the exemption that protects homeowners from a particular kind of creditor—the judgment creditor, a creditor who has sued an individual in court and obtained a legal judgment to collect money owed. A judgment creditor has the right to take several actions to collect the debt, including selling assets like real estate.

Homeowners’ exemption: An annual savings on property taxes

The California Revenue and Taxation Code provides homeowners with a $7,000 reduction in the taxable value of a qualifying owner-occupied residence for purposes of computing the annual property tax assessment.1 With an approximate 1% property tax rate, the exemption provides roughly $70 in annual property tax savings.

To qualify for the homeowners’ exemption, the home must have been the principal residence of the owner as of January 1 of that tax year. A new owner will automatically receive an exemption claim form in the mail and there is no cost to file. To receive 100% of the exemption ($7,000), an owner must file by February 15. If the form is filed after February 15 but before December 10, an owner will receive 80% of the exemption ($5,600) for that year. Once granted, the homeowners’ exemption remains in effect until the title to the property changes or the owner no longer occupies the house as their principal place of residence.

Homestead exemption: A partial equity protection in a home

The homestead exemption was designed to assure that a judgment debtor has a place to live even if they owe money to creditors by protecting a portion of the equity in a home in California from being used to pay a judgment lien on the property. As of January 1, 2022, the amount of the homestead protection is the greater of either (a) $313,200 at a minimum or (b) the countywide median sales price for a single-family home in the calendar year prior to the calendar year in which the exemption is claimed, not to exceed $626,400. These amounts are adjusted annually for inflation and are based on the change in the annual California Consumer Price Index for the prior fiscal year.2

Automatic homestead versus declared homestead

Currently, the California homestead exemption is automatic, meaning that a homestead declaration does not need to be filed with the county clerk. Under the new 2021 law, $300,000–$600,000 of a home’s equity cannot be touched by judgment creditors. However, the automatic exemption only protects the homeowner’s equity in the property under a forced sale due to the request of a creditor. If a homeowner chooses to sell their home, the mortgage lender will be paid first, followed by the judgment creditor, which can leave the debtor/homeowner without any remaining equity.

Additional equity protection is afforded for a declared homestead, a situation where a homeowner has filed a legal form with the county recorder declaring the qualified property. In a declared homestead exemption, the homeowner’s equity in the property will be protected whether the sale of the home is done voluntarily by the homeowner or involuntarily by a creditor through a forced sale.

Also, if a declaration is filed, the debtor/homeowner can voluntarily sell the home and keep the net proceeds up to the homestead amount after the mortgage lender is paid but before the judgment creditor is paid. The proceeds will be protected for a full six months or indefinitely if the homestead amount is invested in a replacement home during the six-month period that follows the sale.3 Filing a declaration may be a good idea for anyone with equity in a home.

Limitations of the homestead exemption

The following are some additional limitations of the homestead exemption:

  1. If the home is used as collateral for a loan (e.g., mortgages, deeds of trusts, taxes) the lender retains the right to foreclose on the property and the borrower will not qualify for the homestead exemption.
  2. State law does not protect a home from federal actions, so if the IRS or other federal agencies are the creditors, the homestead exemption does not apply.
  3. With the automatic homestead, homeowners who choose to sell their homes are not protected from judgment creditors; the homestead exemption only applies when the sale is forced by the creditor.

How to file a homestead exemption

A homeowner must file for the homestead exemption with the correct county recorder’s office. An example of a form can be found here. Additionally, if you are interested in learning more about the homeowners’ or homestead exemption laws, please contact your Cerity Partners advisor or request an introduction today.

1 California Legislative Information, “Revenue and Taxation Code, section 218” 

2 California Legislative Information, “Assembly Bill No. 1885, Chapter 94” 

3 California Legislative Information, “Code of Civil Procedure, section 704.960”

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