Business Depreciation of Homestead Jeopardizes Bankruptcy Exemption

There has been significant bankruptcy litigation over whether or not a debtor loses his Florida  homestead exemption if he uses his home to conduct business. Courts are divided; the law differs depending upon the district where the debtor files bankruptcy.

Bankruptcy courts in the middle district of Florida make a distinction between homesteads located in a municipality and homesteads located in the county outside the city limits. A debtor may conduct a business on a county homestead, but homesteads in the city are limited to residential use. The middle district courts point to provisions of the Florida Constitution that make the distinction between municipal and rural homestead properties.

In the southern district bankruptcy courts homestead use in or outside the city is generally restricted to residential use so that commercial use of the homestead could jeopardize the exemption in whole or in part. A recent southern district bankruptcy case elaborate on this interpretation.

This bankruptcy debtor owned a house in Tequesta, Palm Beach County, which he claimed as an exempt homestead in a Chapter 7 bankruptcy case.. The bankruptcy court decision did not state whether the debtor’s house was within a municipality because that issues is not relevant in the southern district. The court said that bankruptcy debtor does not lose homestead exemption merely because he works form home. The issue is whether any portion of the property is used exclusively for commercial process. An example of an exclusive commercial use is when a debtor leased a structure or portion of a property to a third-party business

In this particular case, the debtor sought to depreciate a portion of her house for tax purposes so he filed a statement with the IRS affirming that he used 25% of the homestead exclusively for business. The tax deduction was his undoing in bankruptcy court. The court said that because the debtor had affirmed that 25% of his property was exclusively used for business the Trustee could sell the entire property and allocate the net sale proceeds 25 % to creditors and 75 % to the debtor.

In re Shaker Case No. 13-29172

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