Can I claim a homestead exemption on my house even though I also operate a business there?

In a recent case I handled, this issue came up.  The result was reported on the front page of Massachusetts Lawyer’s Weekly on November 30, 2015.

The debtor owned a two-story home.  On the first floor he operated a business – a small insurance agency.  On the second floor was his residence, where he had lived for more than 30 years and raised his children.

The Bankruptcy Trustee objected to his claim of homestead exemption, arguing that the property was not solely his home, but was instead a “mixed use” property and did not qualify for the homestead exemption.  My colleague, Jenifer De Christfaro of Reading successfully argued the case in the Bankruptcy Court, which overruled the Trustee’s exemption, but the Trustee appealed.

I was brought in to handle the appeal.  On appeal, I argued that recent changes to the Massachusetts homestead law in 2010 were intended to expand homestead protection, and to close loopholes which had caused homeowners to inadvertently lose homestead protection in the past.  Also, the Massachusetts homestead law is limited only by dollar value, not by useage (as in other states).  Thus, so long as the debtor uses a significant portion of the property as his dwelling, the homestead exemption should apply.  The appeals court agreed with me and affirmed the Bankruptcy Court’s ruling that the homestead exemption applied.

The case was Nickless v. Catton, 15-40044 (U.S. District Court, Dist. Mass., Nov. 17, 2015) .

The appellate court considered the two reasons which underlied the lower Bankruptcy Court’s decision:  “First it held that the mere fact that a property is not used exclusively as a residence does not preclude such property from being a single-family dwelling for exemption purposes.  Second it decided that the Property’s predominant purpose was residential.”

As to that first issue, the Trustee observed that the new homestead statute applies only to a “home” which is defined as a single family dwelling, a 2-4 family dwelling, a condo, a co-op apartment, and a mobile home.  The issue was whether Mr. Catton’s building was a “single family dwelling” since none of the other kinds of “home” applied.  The Trustee argued that the presence of the insurance business on the first floor meant the building could not be considered a single-family dwelling.  In the Trustee’s view, it was more than a single family dwelling.

The appellate court however examined the plain language of the new Homestead Act which does not preclude a mixed-use building from also simultaneously being a single-family dwelling.  U.S. District Judge Leo T. Sorokin observed the new law does not contain a “purity requirement” that the home be used solely for residential purposes.  In addition, the court applied common sense, stating:

“Common sense buttresses the Bankruptcy Court’s interpretation. Many people perform work from their home, some out of a so-called ‘study,’ others at the dining room table, and still others in particular areas designed for receiving clients or patients.  It belies common understanding to not consider these houses single-family dwellings, yet [the Trustee’s] construction compels that result. Many children experience their first lesson in entrepreneurship through selling lemonade in their yard during hot summer days – under [the Trustee’s] reading, such a lemonade stand would arguably strip its operators’ residence of dwelling status. And if a homeowner in Foxborough were to rent out her driveway to Patriots fans on Gillette Stadium game-days, or her teenage daughter operated a lawn mowing and shoveling service out of the home year-round, it defies intuition to think she no longer lives in a single-family dwelling, yet [the Trustee’s] interpretation would make it so.”

As to the second issue, the Court concluded that it need not determine “how much non-residential use is required to strip a residence of its dwelling status, as long as the residential use predominates.”  Even though the area occupied by the first floor insurance office was larger than the living area on the second floor, Judge Sorokin found that the lower court’s determination that the residential use of the property “predominated” was still not clearly erroneous based on the mass of other facts supporting that conclusion, including:

  • Due to his age and health, Mr. Catton received very little income from the insurance business in recent years, both as an absolute number and as a percentage of his total income;
  • Mr. Catton actually resided on the property for over three decades as his sole and exclusive home; and
  • The property is in the “Urban Single Family” zoning district, which explicitly permits in-home occupations.

Thus, so long as the use of your home is predominately residential, there is no need of your bankruptcy lawyer coming by with a tape measure and sketch pad to determine the square footage utilization.  In the vast majority of common home occupations, the homestead exemption applies.


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