This blog is part of the ongoing monthly series, Top Ten Legal Tips for the Owner of Rural Land In Texas written by attorney and firm principal, David Braun. Through this series, we hope to help owners of Texas rural land better understand the extent of their rights, and even discover some new ways to protect and preserve their land for generations to come.
Texas law protects the homestead of every landowner from most creditors. Landowners have a great deal of discretion in designating their intended homestead, which may be urban or rural, so owners of several properties may choose between them to protect their most valuable assets. Texas homestead laws are widely acknowledged to be the strongest in the nation, but many owners of rural land are inadvertently at risk of losing a major portion of their homestead rights. Texas landowners should affirmatively claim all the homestead rights they need to protect their families and their land.
Landowners should protect their homestead from creditors
Many owners of rural land make the mistake of claiming their homestead rights for property tax purposes; not realizing that this can limit their protection from creditors. For property tax purposes, a “resident homestead” is limited to a house and 20 acres. For protection from creditors, an individual rural landowner may designate up to 100 acres as their protected homestead and a family may designate up to 200 acres. To compound the mistake, most rural landowners opt for 1 acre or less as their “residential homestead”, because they want to maximize the amount of land they claim for agricultural or wildlife management appraisal. By default, the claim made for property tax purposes becomes the landowner’s homestead for creditor protection. The only way to be certain of overcoming this mistake is by affirmatively claiming more acres for creditor protection.
Homestead protection should be part of a comprehensive plan to manage risk
At Braun & Gresham we recommend filing an Affidavit of Homestead in the deed records of the county after a thorough analysis of all the assets at risk and the strategies available to manage risk. Using risk management tools to limit liability, protecting assets from creditors and reducing exposure to losses is best handled through a comprehensive plan that takes advantage of many strategies. Homestead protection is a powerful tool that is available to every landowner, but is most effective when used in conjunction with other statutory and legal strategies to isolate and manage risk. When used in tandem with limited liability entities, appropriate insurance coverage and other related tools, homestead protection can form the core of effective and multi-purpose risk management.
The only creditors who can force the sale of a homestead for payment of debts are lenders of purchase money on the homestead, taxing entities who are owed taxes on the homestead, vendors with valid liens for work performed on the homestead, and certain lenders against home equity or for reverse mortgages. Any other debt, whether from a business loss, medical emergency or accident liability, cannot put a qualified homestead at risk. Even the proceeds from the sale of a homestead are protected from creditors for up to six months while a new homestead is being established. Texas is truly the leader in the country in protecting families from losing the safety net of their homestead.
Until a constitutional amendment became effective in January 1998, Texas homestead protection was so strong that it prevented borrowing against equity in a homestead or reverse mortgages. Even now, home equity loans in Texas involve numerous restrictions and requirements that are not found in other states. Rural homesteads that are qualified for agricultural use for property tax purposes may not be able to secure a home equity loan, except in special circumstances. Rural landowners who may need to use their property as collateral for such loans should consider other options before designating their homestead, but they should also consider other options for credit before giving up their maximum homestead protection.
Landowners should choose the right tool to manage each asset
Rural homesteads may be up to 100 acres for individuals and 200 acres for families. Urban homesteads are limited to 10 acres. Whether a property is urban or rural is a crucial question and determines many facets of the homestead protection. A property is urban if it is in the jurisdiction of a municipality, served by police and fire protection, and receives at least three of the five utility services generally provided by a municipality – electric, gas, sewer, storm sewer and water. A person does not need to live full time on their property or even have a home on the property to establish a homestead. Intent to use the property as a homestead and overt acts in preparation to make it a homestead are sufficient to make land into a homestead. Demonstrated intent and preparation can even work for out-of-state landowners who want to claim homestead protection for their Texas land.
Only individuals and certain types of trusts can claim homestead protection. Corporations and limited liability companies and partnerships cannot have the protection of a homestead. Again, this points out the importance of considering homestead protection in the context of a comprehensive plan. The value of entities in estate planning and in establishing management structure on properties with multiple owners may outweigh the value of homestead protection. This balancing of factors can lead to choosing different risk management strategies for different assets. The key is to use the right tool for each asset and to meet the overall goals and achieve the maximum protection of the family.